“A society grows great when old men and women plant trees in whose shade they shall never sit.” This timeless Greek proverb captures the spirit of legacy planning – building something today that benefits generations to come. In the world of financial planning, certain account types stand out for their ability to compound wealth, minimize taxes, and pass assets efficiently to heirs.
Here are three powerful tools for long-term, multi-generational wealth building, plus one honorable mention that deserves attention.
Honorable Mention: Pre-Tax 401(k) & Traditional IRA
These accounts are staples for high-income earners, offering immediate tax deductions and tax-deferred growth. But they come with caveats:
- Required Minimum Distributions (RMDs) force taxable withdrawals in retirement, reducing the compounding benefit over time.
- New inheritance rules can trigger significant taxes for non-spouse beneficiaries, especially those already in high tax brackets.
- Future tax uncertainty. With historically low tax rates today 1, there's a strong case for paying taxes now rather than later.
While still very valuable, these accounts can become tax time bombs in retirement and are less flexible for legacy planning.
Third Place: Health Savings Account (HSA)
Often overlooked, the HSA is a triple-threat: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. But the account can also be treated as a long-term investment vehicle:
- Funds can be invested in growth assets once a minimum balance is met.
- Paying medical bills out-of-pocket allows the HSA to grow untouched and reimbursements can be claimed years or even decades later 2.
- No RMDs, and funds can be used for you, your spouse, or eligible dependent’s medical expenses, including dental and vision.
- Leaning more heavily on your HSA in retirement preserves your other invested assets, allowing them to compound longer.
Bonus:
After age 65, HSA funds can be used for non-medical expenses without penalty (though taxed as ordinary income).
Heads-up:
Requires a high-deductible health plan and meticulous recordkeeping to track unreimbursed expenses. Upon death, non-spouse heirs must liquidate the account and pay income tax.
Second Place: Roth IRA
The Roth IRA flips the traditional retirement model: pay taxes now, enjoy tax-free growth potential and withdrawals later once certain conditions are met. It’s a favorite for long-term planners because:
- No RMDs mean uninterrupted compounding.
- Inherited Roth IRAs must be emptied within 10 years, but withdrawals remain tax-free.
- Ideal for those expecting higher future tax rates or wanting to leave behind a tax-efficient legacy.
Limitations:
Contribution caps ($7,000–$8,000/year in 2025) can slow growth potential unless advanced strategies are used. Still, the Roth IRA remains one of the most powerful tools for tax-free wealth transfer.
First Place: 529 Plan
Surprise winner? The 529 plan, traditionally used for education savings, can be a stealth legacy-building powerhouse when used creatively.
- Contributions grow tax-deferred and can be front-loaded with five years’ worth of gifts.
- No RMDs and the ability to rename successor owners and beneficiaries allows the account to potentially stay in the family for generation 4.
- Contributions are considered completed gifts, helping reduce estate tax exposure while retaining control.
Imagine a scenario where education expenses are paid out-of-pocket, allowing the 529 to grow untouched. With disciplined planning and generational cooperation, this account could achieve significant growth over a century – without ever triggering probate or RMDs.
Cautions:
- Non-qualified withdrawals still incur taxes and penalties.
- Not all plans allow successor renaming, so choose carefully.
- Generation-skipping transfer taxes may apply, so coordination with estate professionals is key.
- Multi-generational success depends on future generations continuing the strategy.
Legacy Beyond Family
Not everyone has children or heirs. For those looking to make a lasting impact, a Donor Advised Fund (DAF) 5 offers a way to support charitable causes in perpetuity. DAFs can be structured to give for decades, creating a legacy of generosity that lives on.
Want to explore how these strategies could work for you? Schedule a free one-on-one conversation to align your goals with effective tools for building lasting wealth.
Sources:
- https://taxfoundation.org/data/all/federal/historical-income-tax-rates-brackets/
- https://www.fidelity.com/learning-center/smart-money/hsa-reimbursement
- https://www.raymondjames.com/commentary-and-insights/retirement-longevity/2024/11/19/through-the-back-door-to-bigger-retirement-savings
- https://www.schwab.com/learn/story/using-529s-multigenerational-education-planning
- https://www.raymondjamescharitable.org/giving-options/donor-advised-funds
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Past performance is not a guarantee of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification.
Donors are urged to consult their attorneys, accountants or tax advisors with respect to questions relating to the deductibility of various types of contributions to a Donor-Advised Fund for federal and state tax purposes.
Contributions to a traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.
529 plans come with fees and expenses, and there is a risk they may lose money or underperform. Most states offer their own 529 programs, which may provide benefits exclusively for their residents. Please consider whether the state plan offers any tax or other benefits. Tax implications can vary significantly from state to state. Tax laws and provisions may change at any time. Death of the contributor prior to the end of the five-year period may result in a portion of the contribution to be included in the contributor’s estate. Please consult a qualified tax professional to discuss tax matters.
