People Without Kids Are Hacking 529 Accounts for a Roth Backdoor

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1:50Carol Massar:Seize your opportunity at michiganbusiness.org. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. Okay, so we were just talking about 529 plans, right? You have one for your kids. You open them up. It's going to help pay for college. Yeah, should I send a link out so people can donate? Yeah, exactly. You don't do that at birthdays? It's very easy, yeah. That's the thing to do at birthdays. I know. But the rules have changed a little bit. So now families who don't have kids, they're starting to open theirs because there's a little kind of, I guess you could say, a Rothback doer to it.

2:32Carol Massar:Let's explain. Sounds like we need an explanation. Yes, we need an explanation for it. So let's go right now to Sarah Foster. She's Bloomberg News personal finance reporter. This article was just fascinating to me because personally I have one for each of my kids. but then sometimes you may have money left over. You can send it to me. Yeah. No, there's a better place to put it. So if my son, let's say join national guard. So I switch it to my daughter, then she decides to join ROTC. They're going to pay for the school. So it's this money left over. Um, and then you can find out you can transfer it to this Roth IRA, but families are starting to do this who don't have kids.

3:07Carol Massar:Explain the reason why it's gotta be retirement. It's so fascinating. It's kind of one of those like maximization stories. It's people who, you know, they've already looked at maxing out other accounts, like their 401k, their Roth IRA, they're squeezing every last dollar. So they're turning to the 529 plan, not really as a way to save for education, but as a way to kind of, you know, hedge against a changing job market, but also get a head start on, you know, their retirement accounts or their kids' retirement accounts. And the way that the rule works is that Congress now allows up to$35 ,000 to be transferred from a 529 into a Roth IRA.

3:47So can you transfer it all at once? Not all at once. Yeah, you're still going to bound those annual Roth IRA contribution limits, which this year is$7 ,500. You kind of have to plan it out in advance. Again, it's very complicated, but these are people who are really fascinated with personal finance.

4:03Carol Massar:So then how would it work for somebody who says, okay, I don't even want to plan for having kids. I don't think I'm going to have kids. I have a 401k. I want to use a 529 to save money for myself. How would they do that? Yeah. Because don't you have to open it in a kid's name? I thought I had to do that. You can open it and you can set yourself as the beneficiary. So that's kind of, you can go to any plan. Although if you live in a state where there are these like tax benefits for contributing to it, it might make more sense to open one with your state. New York is one of those states. Yep. The majority of states kind of have these tax benefits.

4:32But you can also open it with Fidelity. I spoke with someone who says she's a big Fidelity fan. She picked the 529 because it allowed her to keep her brokerage account, her Roth or Array all in one place.

4:43Carol Massar:But then are people out of luck if their 529 grows to bigger than$35 ,000? They can't actually convert it to a Roth? It's definitely a risk. A lot of advisors we talk to say that if your plan is to max out the Roth or Array, you might as well just do that. There's lots of risks here. I think there's two things to really kind of bring up. There is a penalty. So you can access the funds in the 529, but there's a penalty that you would pay if you use it for something other than education. Interestingly enough, a lot of people I talked with say they're kind of willing to take those risks. but you can also you know use it for there's a wide variety of use cases for it these days like if you want to get like I'm working on my you know certified financial planning license right now if I want to you know pay for that schooling for the education I can do that professional licenses and then you know if I maybe have to change careers I can use it to go back to school there's a lot of ways beyond just your kids college that you can use this account for I've always been curious Can you use it for like a first time home down payment?

5:47Carol Massar:I mean, do you get a penalty for using it for something like that? So it's kind of a complicated process. You can take the funds from the 529. You can roll it over into a Roth. And then your Roth does allow the ability for you to take the money out. But there's other stipulations. It allows you the ability to take it out for a first time home by your payment. But when you roll funds over, it has to be in your account for five years. So there's lots of tricky things. I'd say consult with a financial advisor to help walk you through it. But there are lots of use cases that you get from a Roth IRA.

6:19Carol Massar:I think there's also like risk here for what Congress will do and how it treats this money. Because a 20, let's say 20 year time horizon, there have been changes to what you can do with 529s in the past couple of years. Absolutely. Those changes could come for the, you know, plus or minus too. Definitely something to be aware of. I think, you know, tax policy is very uncertain. I think even the rules regarding Roth IRAs can be uncertain, too. You know, Congress could change that as well. But right now, I think what the financial advisors that, you know, we spoke to, my colleague and I, Josie, who worked on this piece with me, you know, we really heard from a lot of people about how it does make sense.

6:58If there is the off chance that you might even have children, it probably makes sense to kind of start this clock now.

7:04Carol Massar:So Lisa, if you have extra leftover money for your kids' education, let's say they don't go to grad school. Their college is already taken care of. Couldn't you then leave it to your grandkids? Like future grandkids? Because it's still part of, it's a different generation. I don't know, does that work like that? Is it like a gift? I mean, can you gift it? So you could just let it grow and your grandkids could go to college. Interesting. Maybe at a discount, I don't know. But then if they don't have kids, then it all comes back to your retirement. It always comes back to the retirement. Yeah. But I mean, it is also, there's a limit to that though.

7:43Carol Massar:True. True. True. There isn't it. But the whole gifting, I mean, you can gift it to your niece and you know, that's true. I have, I have four nieces. Oh, well, good luck with that. You talked about some of these things you mentioned, you can use it for, for certifications, different things, maybe private school for gifting too. So how does the gifting actually work? Because that's what I was curious about. I wouldn't have mentioned it before. Yeah. So in this instance, if you were to gift it to a niece, a nephew, grandchild, you know, you would have to change the beneficiary. It's a beneficiary.

8:16And advisors do say it's kind of a complicated process. You know, there's paperwork involved. If, you know, if an advisor hasn't really been involved with changing the beneficiary, you might have to do a little of a hunt and a search for it. But this is how the process would work. And if you were to roll it over into a Roth IRA, the Roth would also have to have the same beneficiary as the 529. So, again, lots of little stipulations. My head is spinning right now. But it can work.

8:44Carol Massar:I think one thing this highlights, too, though, is it still doesn't solve the retirement or money-saving crisis that affects so many Americans. So, even, you know, we hear study after study, and you write about these, is that we are just not prepared as a nation for retirement. This isn't necessarily something that fixes that. Especially when you're still bound by those annual contribution limits. I think it's very hard. It can help, but it's very hard to address that big problem. But I think one thing that really does stand out to me about stories like this, and when I'm talking with people who are always trying to get ahead, is they're continually trying to find ways to maximize their money.

9:24This uncertain economy is really inspiring them to find these new hacks. I mean, before this piece, I had never thought about it. So, you know, maybe someone else will discover another way to help address the retirement issue.

9:35Carol Massar:Well, we're certainly glad you're writing about it and you're joining us on Bloomberg Businessweek Daily. Sarah Foster is personal finance reporter for Bloomberg News.

9:45Carol Massar:Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChachiPT to work on your most ambitious ideas and projects. Get started at ChachiPT.com by selecting Work Mode, available on Plus and Pro plans.

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11:56Carol Massar:is not intended to diagnose, treat, cure, or prevent any disease. When you're running a business, the best days are the ones where priorities stay on track. For midsize and large companies, risk can affect multiple parts of the organization at once, from property and liability to cyber and regulatory challenges. At that level, managing risk becomes an ongoing discipline. At the Hartford, the focus is on helping businesses manage risk before it turns into something more disruptive. And when losses do happen, that work is paired with insurance coverage shaped by years of underwriting, risk engineering, and claims experience.

12:28Carol Massar:Learn more at thehartford.com slash risk mitigation. Policies provided by Hartford Fire Insurance Company and its property and casualty affiliates, Hartford, Connecticut. As industries evolve faster than ever, companies need an environment that accelerates strategic growth. And Michigan delivers on that promise. From emerging startups to global enterprises, Michigan offers what executives value most, a resilient, innovative ecosystem, diverse communities that attract top talent, and a quality of life that supports work-life balance. With our unified Team Michigan approach, businesses scale faster and compete at the highest level.

13:03Carol Massar:Michigan, pure opportunity. Seize your opportunity at michiganbusiness.org. Before you sign off, you tuned in for ways to help teams move faster, make sharper decisions, and turn scattered contexts into work they can use, ChatGPT for Business can help. ChatGPT for Business gives teams a shared workspace with admin controls, permissions, and access to work and codecs in ChatGPT. This means your business can move from question to answer and code to rollout quicker. Join over 10 million business and enterprise users worldwide already using ChatGPT for Work. Download the ChatGPT desktop app or contact sales to learn more.