Back in 2020 I wrote an article titled, “How to Leave a $1 Million Legacy to Your Children or Grandchildren with Only $10,000.”
How about we improve upon this outcome by several million dollars?
Congress recently created a new rule under the Secure Act 2.0 that can be layered on top of the original strategy to dramatically improve the outcome.
Let’s quickly recap the original strategy:
The approach calls for setting up a custodial Roth IRA account for your child or grandchild. The idea is to contribute $10,000 into a custodial Roth account by the time they are 18, which, when properly invested, could grow to just over $1 million over the course of their lifetime—and when the money is taken out during retirement, they pay zero taxes on the gain.(Link to original article here).
There is one caveat: the child or grandchild must have “earned income” to contribute to any retirement account, so the account cannot be opened and funded until they are of working age.
Now let’s improve upon it.
The Secure Act 2.0 now allows up to $35,000 to be rolled over from a 529 education savings account into a Roth account. This allows funds to be invested much earlier, giving the money more time to grow.
Here are the simple steps:
- Set up a 529 when the child or grandchild is born and fund it with $10,000.
- At age 18, roll up to $35,000 out of the 529 (tax free) into a Roth IRA and invest for long-term growth.
An additional benefit: gifted money from family and friends can now be turned into retirement savings.
Doing some time-value-of-money calculations with this earlier starting point now allows the portfolio to grow to over $4 million dollars.
Using the Secure Act 2.0 now improves the original outcome from $1 million to $4 million dollars.
-Paul R. Rossi, CFA
*Keep in mind there are additional details that investors, parents, and grandparents need to understand before implementing this or other strategies.