People Without Kids Are Hacking 529 Accounts for a Roth Backdoor

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, Podcasts, Radio, News.

**SPEAKER_2** (0:08)
You're listening to Bloomberg Businessweek with Carol Massar and Tim Stenovec on Bloomberg Radio.

**Carol Massar** (0:16)
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.

**Tim Stenovec** (0:21)
Yeah, should I send a link out so people can donate?

**Carol Massar** (0:24)
Exactly, you don't do that at birthdays?
That's the thing to do at birthdays, you send a link. 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 door to it. 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.

**SPEAKER_5** (0:54)
Yeah, no, there's a better place to put it.

**Carol Massar** (0:58)
So if my son, let's say, joined National Guard, so I switch it to my daughter, then she decides to join ROTC.
They're gonna pay for the school. So it's this money left over, 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. Explain the reason why it's gotta be retirement.

**Sarah Foster** (1:16)
It's so fascinating. It's kind of one of those maximization stories. It's people who've, 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 hedge against a changing job market, but also get a head start on 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 Array.

**Carol Massar** (1:53)
So can you transfer it all at once? Not all at once.

**Sarah Foster** (1:56)
Yeah, you're still kind of bound to those annual Roth Array 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.

**Tim Stenovec** (2:10)
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?
Because don't you have to open it in a kid's name?

**SPEAKER_1** (2:23)
I thought I had to do that.

**Sarah Foster** (2:24)
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.

**Carol Massar** (2:35)
New York is one of those states.

**Sarah Foster** (2:36)
Yep, there is, the majority of states kind of have these tax benefits. But you can also open it with fidelity, you know, 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 Array all in one place.

**Tim Stenovec** (2:50)
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?

**Sarah Foster** (2:57)
It's definitely a risk. If this, you know, a lot of advisors we talk to say that, you know, if your plan is to max out the Roth Array, you might as well just do that. It's, you know, 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 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 kid's college that you can use this account for.