Are You Waiting To Build Generational Wealth?

This is an email I originally sent my list back in December 2021. Interested in more of this goodness in your inbox? Sign up here (and get a freebie)!

With a 3 year old and almost 6 year old, my husband and I spend much of our time just waiting around.

Like every weekday when my son comes home from daycare, he insists on taking off his jacket by himself. You’re thinking, “Isn’t that a good thing? Independent child, etc.?”

Maybe, but it takes him for. forking. ever. to wriggle his little arms out of the sleeves.

The reason I put myself through the jacket-wriggling Waiting For Godot act every day is, of course, because he and I want him to learn how to do it himself. And every day, this play gets shorter and shorter until he can *theoretically* take off his jacket in no time and (maybe?) hang it up himself.

Compound interest is like a toddler learning basic life skills. It takes awhile to see any progress, but it’s truly exponential growth once it gets started.

Let’s say, for example, you invest $5,000 today in a brand new 529 for your own (imaginary) wriggly toddler and pick a portfolio that automatically adjusts itself to assume your 3 year old will be in college in the year 2036.

This means that it’s almost all stocks right now (aka aggressive or risky) and will automatically adjust itself over the years to be more bonds and cash heavy (aka conservative or not risky) until you have a mostly cash portfolio by 2036. Which means you won’t lose all your money if the economy tanks a month before your kid goes to college.

So anyway, assuming an average 7% return, and that you added $300 every month for 15 years, you could have over $100,000 by go-time. Of that total, $59K were your contributions and the rest was *tax-free growth*!

I do need to caveat: if you go on to do this, you’ll need to remember that any investment account will have fees associated with it, however small, so those will make your real life number less but still more than it being in a savings account.

I’m hoping this example got you excited about building generational wealth to set up your own threenagers for success (or however old they are!). So here are a few types of tax-advantaged investment accounts that help you really take advantage of tax-free compound interest growth:

[As always, this info is educational only, and isn’t personal investment advice!]

1. 529s: you’re probably familiar with these or already have them, but just in case: 529s let you invest money for your children’s higher education, or up to $10K for K-12 private school tuition. You won’t be taxed on withdrawals from your 529 as long as you’re withdrawing money for qualified educational expenses.

2. Your Roth IRA: while the primary purpose of your Roth should be to cover YOUR retirement, they’re also great vehicles for passing down wealth. Unlike your 401k or 403b, there are no “required minimum distributions” (RMDs) for a Roth IRA.

So if you can cover your retirement and end of life expenses with your other assets, you can leave your Roth IRA untouched to pass along to your children as the beneficiaries. This means tax-free growth on an investment account for your kids!

Generally, heirs can make tax-free withdrawals for up to 10 years. Spouses can generally treat Roth IRAs as their own. Read more here.

3. A custodial Roth IRA: there is no minimum age required for someone to have a Roth IRA, but it needs to be opened as a custodial account if the account holder is under 18. So if your child is earning legitimate income from a job or neighborhood gigs – or if you have a small business and can pay them a realistic amount to help you in some way – this is an excellent way to start. Learn more here.

By the way, legitimate income includes things like babysitting, dog walking, helping neighbors with yard work, and other activities your older kids may already be doing!
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There are a plethora of other ways to build generational wealth, but this email is getting long and I want breakfast.

I hope this note was helpful, and enjoy what’s left of your weekend!