I love the phrase “wealth acceleration.” It means finding ways to leverage our current success and accelerate the success of the generations coming behind us.
One such tool is the 529 education savings account. You very likely already know what they are, but in the last 18 months, the rules have changed. 529s are now a massive wealth acceleration vehicle impacting more than just education for your kids or grandkids. I’m talking about a financial juggernaut that can last generations.
For this example, I’ll talk to the grandparent who likely has a little more spare change lying around than their adult children. Here’s an example of real conversations we’re having with clients.
The Compounding Power of Front-Loading 529s
Here’s the scenario: you have more than you need for retirement. You welcome a new grandbaby into the family.
What would happen if you put $100K into a 529 before their first birthday?
If we use the Rule of 72 as a guide, that money very well may double two times by their 18th birthday. $100K becomes $200k, which becomes $400K. Now, if college costs $400K by the time they’re 18, I’m out of ideas.
Otherwise, here’s what happens to that money.
- The first portion goes to funding education–everything from undergrad to doctorate work. And did I mention it also covers trade schools?
- Up to $35,000 of leftover money can be rolled into a Roth IRA–more on that below.
- The remaining funds become a massive head-start nest egg for their kids someday.
With one larger upfront investment, you may have just funded multiple generations of education. That alone is an unbelievable impact.
But what about that $35,000 that goes to the Roth IRA? If you thought the 529’s compounding was impressive, let’s consider giving an 18-year-old several decades of tax-free growth.
Once again with the Rule of 72 suggesting investments double every 6 years, let’s follow the timeline:
- 18 years old – $35K
- 24 – $70K
- 30 – $140K
- 36 – $280K
- 42 – $560K
- 48 – $1.2M
- …..
Now, we all know that markets aren’t guaranteed, but when we approach investing as a “time in the market” value proposition, few strategies are better. We’re giving our assets a maximum amount of time to compound.
And oh, by the way, we funded any education they could possibly need.
Rethinking 529s
Hopefully, now you can see why we’re heavily pushing 529 conversations as wealth acceleration tools. If we can be patient, time has an incredible track record.
What can you do to massively raise the ceiling for the next generation? A simple 529 may be one of the best tools at your disposal.