When Does 13,000 = 1,000,000?
No, this isn’t a trick question.
The most obvious answer combines patience and discipline, and maybe a bit of good luck.
Own growth-oriented investments like stocks for a long time. A REALLY long time. Historically, that would have done the job. Since 1945, the average 50-year return (yes, 50 years) for the S&P 500 is over 7%, and that’s before dividends. The WORST 50-year stretch would have returned 5.3% per year, again before dividends.
For the curious, here is how long an investor would need to wait to grow $13,000 into $1,000,000 at different rates of return.
Many of us don’t have 50 years or more to wait. But you know who might? Those little tax credits we call children.
So for those who might be so inclined, here are six steps to giving a newborn $1 million, tax-free, starting in 2024:
Step 1: Find a newborn. How? If you hear loud crying, smell odd smells, or are awaken by something multiple times throughout the night, there’s a good chance you are near one.
Step 2: Open a 529 account, naming the child as the beneficiary. Fund it with around $13,000 and invest with a 7% return target. The gift should be tax-free unless you’ve already done a lot of giving. Ask a tax pro for specific advice here. What if Junior doesn’t need to money for qualified education expenses? Will you have to pay penalties or taxes? Not a concern – see the next step.
Step 3: Wait 15 years and tell the kid to get a job. Why? They need income and convince them it will be worth it. If the account compounded at 7% per year, it will be worth about $35,000. Assets in 529 plan accounts grow tax-deferred, so Uncle Sam should have left it alone. Roll the maximum annual Roth IRA contribution amount (currently $6500) from the 529 account into a Roth IRA in the grandchild’s name. This is only possible if the person has INCOME. Repeat each year until the lifetime $35,000 limit is reached.
Step 4: Continue to invest for growth, assuming you can earn 7% per year on the investments.
Step 5: At age 65, look at the Roth IRA account value and see it has grown to about $1.031 million, which is what $35,000 will grow to if compounded at 7% per year for 50 years.
Step 6: Spend money on stuff. Or let it keep growing. Their choice. Maybe the best part? It’s all tax-free. If certain basic criteria are met, like reaching the appropriate age and having the account for a certain length of time, both contributions and earnings may be withdrawn free of income tax.
Not a bad way to leave a legacy, if that type of thing interests you and you’re in the fortunate position to be able to give.
Why are you just now hearing about this? The SECURE Act 2.0, which was passed late last year, introduced the 529-to-Roth IRA rollover. Before SECURE 2.0, this was not possible. It will be soon, starting in 2024.
This was just one small piece of the bill, and there is plenty more for families and businesses to consider.
Interested in talking more? Email me at eric@divviwealth.com or set up time with the Divvi team to continue the conversation.
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