The 529-to-Roth Hack Sounds Great—Until You Do the Math

Phil, there's a piece going around saying that people without kids are opening 529s as a backdoor into a Roth. You read it. Is it a loophole or not?

So, you're talking about the Bloomberg article?

Yes, the Bloomberg article.

That article, I think it exposes some of what I believe is just really a reach to come up with something that may not really be all that great.

Mhm.

It sounds cool. Sure, it has appeal. I don't think there's real advantage here. I think if you look pretty deep, you can find a little bit there. There's couple possibilities. By and large, no, I don't think it's an advantage.

So, go through the rule, talk a little bit about the article, what was said, and then we'll kind of dive into the nitty-gritty.

Fair enough. So, when Secure Act 2.0 hit the airways. That's been a few years now.

Mhm.

And we're going back several years, actually. Here we are in 2026 and past the halfway point. So, Secure Act 2.0 is not new anymore.

Nope.

We learned with that new set of laws that if you had money left over in a 529 plan...

Mhm.

...up to $35,000 could be rolled into a Roth IRA so long as that Roth IRA was in the name of the beneficiary of that 529 plan.

How long does a 529 have to be open in order to do that rollover?

Well, there's two periods that you have to be aware of.

Yep.

To do the rollover, the 529 needs to be in place, not funded, but it needs to be open for 15 years.

Okay.

Okay. It needs to have the funds that are going to be rolled to the Roth...

Mhm.

...minimum of five years.

Yep.

And so if you haven't met those numbers, then this is a moot point anyway.

Yep. All right. So 15 and five are the numbers you need to remember.

15 and five. That's a good numeric to remember.

So it's not a loophole like most people, that's what I was referring to with the question of, is this a loophole? Not a loophole is what you're saying.

It's not a loophole. If you're going to try to move money from a Roth or, excuse me, from a 529 to the Roth, $7,500 is the amount of that $35,000 that can be moved from a 529 to a Roth. You can only do it in increments of whatever the annual limit is, which in 2026, $7,500, period.

So when people say roll money over from a 529 to a Roth, I can understand that that may be a little confusing, because a typical rollover, say from a 401k plan to a traditional IRA, that has nothing to do with the contribution limit. But the 529 to the Roth, that is a contribution. So it's a combo, if you will.

Okay.

It is a rollover, but it is a contribution. It counts as a contribution.

Y...

So you are rolling it from one to the other, but it is a contribution in that if you're already putting $7500 a year in your Roth, Spell, you don't get to say, "Well, hey, I've got this money that I want to roll over from my 529, I want to do another 7500." You can't do that.

Got it.

Right. You have to say, "Well, I'm not going to do 7500 generally, because I want to use the 529 money, I got to get it out of the 529. So I'm going to use that in lieu of..."

Mhm.

"...my 7500 that I would normally do."

Gotcha.

People are confused on that. This is not expanding the amount that can be dropped into that Roth.

Right.

Still 7500. And if you're over age 50 in 2026, you get another 1,100. So you can do up to $8,600.

Yeah. Right. Okay. So this is a hack that really isn't a hack.

It's not a hack.

Okay.

Here's the thing. So, under the guise of some loophole that doesn't exist, right? The minute that I read the article, I thought, if anybody in their right mind reads this article, they won't need me to talk about it on a video. They're just going to know, wait, that doesn't work. Here's why.

If I'm funding my 529 or, excuse me, if I'm funding a Roth, then I'm putting 7500 in every year.

Yep.

When am I going to get the money from the 529? When do I get that in the Roth? If my game plan for getting me ready for retirement includes 7500 every year into a Roth and I'm already doing that, I don't have new room. And what's the benefit of putting it in the 529 and then moving it to Roth? If I'm already funding the Roth, what's the benefit?

Unless there's a pretty good chance I'm going to have a child and so then I'm going to make them the beneficiary, okay, to fund their college. Maybe that's an advantage. Okay, what's the benefit if I'm already filling all of my savings buckets, and Roth being one of those? Then how do I get the 35,000 into the Roth?

Mhm.

And so, of course, I saw an article that said, "Well, I'll just wait till I retire, and then I'll stop because my earnings will cease." So then I'll still have the 35,000 in the 529, then I'll start moving that over and getting that into the Roth. Well, that doesn't work either. Got to have earned income to put money in a Roth. Got to have earned income. So, if I don't have at least enough earned income to match what I'm putting in there, well, I can't make that roll.

All right. So, I want you to give me the strongest reason or version of case for doing this anyway. High earners can't contribute to a Roth directly. Doesn't this solve that?

Well, high earners can't contribute directly to a Roth. When we say high earners, you're talking about someone who's making a couple hundred thousand a year, right? They're 150 or 200 grand or something like that. They can't just go get a Roth. They're prohibited. They also can't deduct contributions to a traditional IRA, but they can make an after-tax contribution to an IRA.

Mhm.

Still can't go over the limit, but they can certainly put money in to a traditional IRA, and then they can immediately backdoor that...

Yep.

...to a Roth.

Yep.

So I would say no, this doesn't solve that problem, because we can get a high earner, I don't care if they're making quarter of a million, a half million, whatever it is. If they're over the income threshold that prevents them from using or going direct Roth, we can still get them there using a little bit more non-traditional way, but in a traditional IRA, right, after-tax contribution, backdoor.

The other risk that you run, Spell, is overfunding.

True.

You got to let that thing sit for 15 years, and you start just putting money in there every month, every year, whatever. And 15 years later, what if it's 50,000?

Yeah.

What happens to the other 15,000 that you can't move?

Well, I can tell you what happens.

Sure. Go ahead.

10% penalty.

Mhm.

And ordinary income tax on the gain.

Yep.

That's what happens.

Maybe you want to go back to school.

Maybe you want to go back to school. But if you don't, you probably wiped out a lot of the benefit of doing what you did.

Yeah.

Because you got to pay tax on the leftover money. Unless you want to get really generous and give it to a family member.

Yeah.

But so I would have to say, if I were looking at this thing, scale of 1 to 10, I don't want to disparage the article and the people that wrote it, but I wish people would think a little bit more about outcomes before they just decide that they've got a great idea. I don't think this one's all bad, but I think we've picked it apart enough that we can say that there's just not a lot of benefit here. I certainly can't call it a loophole.

Yeah. Yeah.

Phil, what's one question that someone should go ask their estate planning attorney this week? What are the exact words? One sentence.

So, ask your estate planning attorney. This assumes that you have a living trust and that you have provisions in it that are going to create an irrevocable trust on your death. Ask him, for the benefit of your heirs, your children, if there is a spendthrift clause in your revocable trust.

Nice. Nice.