The Roth Advantage Part 4: Time
No one wants to pay more taxes now, but the federal government needs revenue today. This has opened up some huge opportunities for long-term financial planning for retirement and beyond, as well as a huge new benefit for Section 529 plans starting in 2024.
Roth IRAs and 529 Accounts allow certain savers[i] to put away after tax[ii] money for the future. The 529 account is an education funding account, but its uses have expanded quite a bit over the last few years and in 2024 there will be a new option to roll over unused funds from 529 plans into Roth IRAs.
When you’re using a tax advantaged account to save for something, time is your friend. The more growth in a tax advantaged account the bigger the benefit and compounding does its magic over decades. This is part of the reason why the new 529 provision is such a big deal!
A big objection to 529s over the years has been the concern by earmarking those funds for education you are limiting choices in the future. While there are still limits, the ability to put those funds towards retirement is Incredible!
“There are still some limitations. The 529 account must have been open for 15 years and account holders can’t roll over contributions made in the last five years. Rollovers are subject to the annual Roth IRA contribution limit, and there’s a $35,000 lifetime cap on 529-to-Roth transfers.”[v]
A $35,000 balance in a Roth IRA at age 20 growing at 7% would be worth $524,106.02[vi] at aged 60 or $735,085.81 by age 65! In other words, contributing $7,625 to infant’s 529 plan could lead to over half a million dollars tax free in retirement[vii]!!!
The bottom line is that after tax accounts will generally have benefits that grow over time, so getting funds into them sooner rather than later can be incredibly powerful. 529s and Roth IRAs have both gotten more useful over the last few years.
The lower the tax rate you pay when you fund the accounts and the longer you have the better. You may never have taxes this low again and you certainly will not have more time for compounding if you wait to get started.
There’s no time like the present, Happy New Year!
[i] [i] I always recommend consulting a tax professional. if you have any questions about eligibility you can find some of the requirements here: https://www.investopedia.com/articles/retirement/05/021505.asp you can also find all of the requirements here: https://www.irs.gov/
[ii] At the federal level 529 contributions are not tax deductible, in certain states they may be deductible from your state income tax you should always consult a tax professional.
[iii] However, here is what we do know:
Numerous provisions of the 2017 Tax Cuts and Jobs Act (TCJA) are set to sunset at the end of 2025. If that happens, the historically low tax brackets we currently have are set to revert back up to pre TCJA levels in 2026.
[iv] There has been a ton of spending since the passing of the TCJA, things like the pandemic and the wars in Ukraine and Israel have made it even harder to imagine lower taxes in the future.
[vi] https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator All calculations in this piece were done here and believed to be accurate, the calculations assumed annual compounding and no additional investments.
[vii] All investments involve risk, past performance is no guarantee of future results.