The 529-to-Roth "Loophole" Is a Lie (Here's Why) + Social Security Hidden Rules

Today on We're Talking Money, we're talking about a 529 to Roth loophole that everybody's talking about. Plus, if you're turning 62 with kids at home, the IRS owes you more money. Let's start with that one, Phil. If somebody is 62 or older and they have a kid living at home, does Social Security owe them more money?

I got a question for you, Spell. Okay. Who is 62 at home with children? They started late in life apparently. And boy, they need to find some energy because they're going to need it if they have minors at home and they're already 62.

Okay, so let's hone in on a point of clarification. So, it's not just a kid at home. You said minor. I think that's a pretty important distinction, right?

Well, that'd be the only way Social Security would owe money if that's the question you're asking. They have to be a minor unless they're disabled or something like that. But if it's coming off the parent, they got to be a minor.

Gotcha. Gotcha. So, what does Social Security owe that person that they may not know about?

That's a really good question because Social Security has this thing that's been around since the beginning of Social Security. Really, you go all the way back to the 30s and you can find this. If a minor, so someone under the age of 18, living at home, and one of the parents, this is the interesting part about Social Security, it doesn't have to be both parents. One of the parents is turning 62 and chooses to file for their Social Security. So early Social Security filing, that child or children, they have more than one. Okay, they are entitled to a benefit of up to 50% of the parent's Social Security benefit.

Okay? And not based on the amount that they take at age 62 either. Okay, based on their full retirement age or what's called their, it's referred to as a PIA. So they're looking at the entire insurance amount that that person gets, right? That's what this benefit is based on. So it's really interesting. Not a lot of people know about it.

Yeah. PIA, primary insurance amount.

Primary insurance amount. Yeah, that's right.

Okay. So does the kid have to be theirs? What about adopted or stepchild?

Good question. It doesn't have to be theirs, but it has to be adopted. Okay. They can't just simply say, "I'm the guardian." So, it needs to be biological or it needs to be adopted.

Got it.

In that case, yes. And occasionally, you'll find this with grandparents. That can be a situation where if they're adopted or there's documentation done the right way then they qualify. But biological or adopted, those are the two things. If someone listening is thinking, oh wait a minute, I might qualify for this. Biological child, adopted, one of those two, you're going to qualify.

Does the parent have to be retired or just 62?

Well, that's a trick question. No, no, no. I'll give you the answer. Stand by. You ready?

I'm ready. Okay, I'm ready.

So, the key here is they have to file at age 62. That's the earliest you can file. It's the earliest you can file. Okay, they can keep working. Now, the problem with that is there is a not so good rule, if you will, in terms of how they're going to get taxed. So, okay, every $2 that they earn, they're going to give up a dollar of that Social Security benefit. So, they're getting that literally 50% tax. So, they can keep working, but if they're earning enough dollars that then they're going to get clipped pretty hard on their Social Security.

So, yes, they could still work. They don't have to retire, but they have to turn on their Social Security. And if they're earning certain amount of money, their Social Security is going to get hit pretty hard.

Okay. All right. Well, run this on me then. Let's do a little example. Let's say I'm 61, one kid at home, sophomore in high school. My wife is 53. I work part-time. Do I qualify?

Well, not at 61.

All right.

You will. You're listening, right? You got it.

Nice. What the heck is this? What is today's We're Talking Money? This trick question.

It might be.

Come on, man.

It might be.

So, all right. I'm 62. Okay. Same set of criteria. Sophomore at home, wife's 53. I work part-time. Do I qualify?

Yeah, for sure. You're 62 if you want to take Social Security. Now, I'm going to get technical for a minute. All right. You qualify as long as you've worked enough credits to get Social Security. There are people who have lived here for a long, long time. They just haven't worked enough.

Yeah.

And so they don't get Social Security and therefore they would not qualify for this.

So how many credits do you have to have in order?

Well, you need, jeez, what is the credits?

40.

40. Yeah. 40. Yeah. Yeah. So you need 40 credits. And then your benefit amount, your primary insurance amount is going to be based on your best 35.

Got it.

And so if you've got that, sure, you qualify.

Okay. All right. How about my wife? Does she get anything?

She could.

She's 53.

Yeah, she could. She could qualify. Okay. And your children can qualify. Okay. Now, because they qualify doesn't mean they're going to take it, right? There are other things that we ought to consider before we just say that this is absolute, right? There's always, you know this as well as anyone, Spell, as a younger advisor, you've seen why testing everything makes sense, right? We're not about, oh, this will work. Well, let's do that. You got to be sure that it's not going to break something else.

And so, when it comes to getting a survivor or a child's benefit under Social Security, absolutely, those things exist. Doesn't mean they're right.

Right.

Doesn't mean it's the right thing for your situation.

So, how long has this existed? This isn't new, is it?

Been around a long time, Spell. So, I'm well into my 50s. Okay. And I remember my mother and father had quite a gap in age.

Mhm.

My dad was 50, heading almost 51 when I was born. Okay. And so I was about 11 years old when my dad was coming into that 62 mark when he could take early Social Security.

Mhm.

And they did and so I had a brother and we were able to qualify for this benefit.

They have that extra energy you were talking about at the beginning of the show.

You know what, my dad did pretty darn well. He had a lot of energy, but I think it obviously took a toll on him because by the time he was 70, he was really not that energetic. He still tried to work a little bit and still was active, but man, it'll take it out of you. You get a couple of kids running around and you're trying to keep up with those kids, they have a lot of energy.

Yeah.

Whereas a say a 65 or 70 year old still has plenty of energy. But there is a big difference. Okay. And so yeah, it took its toll on him for sure.

Yeah.

So it's been around for a while.

Yep. All right. So, you've given the qualification metrics or standards. So, what's the check? What's the amount?

That's a really good question and we could go through a calculation. I don't think that that is necessarily the thing to do on the show, but I'll give you an idea of how this thing works.

Sure.

It's not as simple as saying here's the insurance benefit that I have from Social Security and my child gets 50% of that. What I will tell you is it is also not based on age 62. So, if I take Social Security at age 62, I'm going to take a 30% haircut from the amount I would get if I waited until I'm 67, which would be your full retirement age.

That'd be the full retirement age. Or, and that varies based on when you were born.

That's right. But for most people that are going to be listening to this, chances are they're going to be 67. So, born post 1939, I think, is the number. And so you're going to be in that 67 range.

Mhm.

I may be wrong on that date, but so if it's 67 and I take it at 62, then first of all, I'm going to take a 30% haircut. So, my benefit is going to be permanently reduced from what it would be at age 67. I'm going to take a 30% haircut. If I wait till I'm 63, it's going to be about a 25% haircut. 64, etc. If I wait until I'm 67 and then I say, I'm not going to take it now. I'm going to wait a few more years. I can wait until I'm 70 and then I get an 8% increase every year just for waiting.

Y

So obviously if you want to maximize Social Security, you wouldn't do this. Okay, you would wait until you're 70. Okay, that doesn't mean we'd recommend that, right? But that's how you'd maximize Social Security.

Now, one thing that this assumes and some of our listeners might be saying, "Well, gosh, will Social Security be around?" Well, the fact of the matter is Social Security is not supposed to be around or it's supposed to be severely impaired by 2033.

Mhm.

Who knows what they're going to do to fix that, but right now we know it is hemorrhaging and it may not be able to cover all of its benefits.

Right.

In some cases, people might think, "Let me go ahead and take it at age 62."

Yeah.

So, I can get some of something.

Mhm.

That may be true.

Sure. Sure.

If you have some minors under the roof, that might be more of a inspiration for you to do it at age 62. And so in that case, what the Social Security Administration's going to look at is they're going to say, "Okay, well, your age 67 amount is whatever it is, they're not going to look at age 62 and they're going to say your children qualify for up to 50% of that primary insurance amount." Okay? Then they're going to do a calculation to decide if that amount needs to come down. And that calculation has to do with something called a family or a household maximum.

Family maximum or a family cap.

Okay? And that cap is generally going to be about 150% maybe 180% of that primary insurance amount. Okay? The amount that you would get at age 67. All right? So, you figure that out and then depending on what those children are supposed to get, 50% of your primary insurance amount, it could be adjusted down and probably will be, especially if the spouse is going to qualify. Three people qualifying generally always going to bust that number.

Got it.

That means we're going to have to address that by reducing everyone's benefit a little bit. Okay. But still a benefit.

Got it.

Right. Still a benefit. So at 62 you start filing. And by the way, you have to file for your children to qualify. Okay? The money's owed, but you have to file. You can't decide, I want my kids to get this benefit, but I'm going to wait a while. They don't get it until you file. If you wait till you're 63, then they're going to wait another year before the benefit starts.

Okay. Does it come out of my check or is it on top of my check?

It's on top of your check.

Okay. All right.

In addition to, this is a separate benefit, okay, that the children get as long as they are minors.

Mhm.

They get that benefit and it does not affect what you are collecting when you start your collection at age 62 or 63 or whenever you start. Your benefit is what it is. Okay. So it's in addition to.

That's good information. Is the check that my kids get, is that check in their name or is it in my name?

It's for their benefit. It is strictly for their benefit. They're not paying you or anyone else. They're paying the child. Okay? Now, they're a minor. They're under your care. You're going to get that check, right? But it is for the child. If that child prematurely deceases you or before they become 18, something happens, check stops. But as long as they're alive and they're 18 under your roof and a student can go all the way to age 19, okay, they're going to get that check.

And then if, let's say you have two children, one hits 19, now his benefit stops and his little sister is still a minor living at home. Her benefit's going up.

Mhm.

And she's going to keep collecting until she hits age 18 or age 19 if she's a student.

Okay. Okay. Is it taxable?

Well, all Social Security gets taxed depending on something called provisional income. So, depending on that, yes, things can be reportable. From a Social Security standpoint, you can pay some tax on Social Security.

Okay. All right. So, let's just say, Phil, you say, "All right, Spell, you need to go file for Social Security on Monday. You've got a kid at home. There's money attached to that kid. Why shouldn't I or why wouldn't I go file?"

That's a great question. And I think this is where a lot of people probably would get in trouble. First of all, Spell, I think it's really important to note there are not many people that are 62 or older who have minors at home.

That's true.

Right. Most people, I would tell you, I haven't looked at the stats on this in a long time, but I would tell you it's probably 1% or fewer, okay, households in America would be in this situation. There's not many.

Yep.

You know, my dad was one of them.

And I don't run into many people. I've done this for 34 years and I have not come across many people. I can't think of a client that I've come across in those 34 years that met this criteria. So first I would just tell you it's not the usual thing.

Right. Right. Right.

So, if you happen to be one of those people—

Uhhuh.

I don't think it's a given to just say that you do it. Here's why. When you start taking at 62, that's not a reversible thing.

Oh, okay.

You've permanently locked your Social Security now because we don't have this start and suspend or file and suspend anymore. Back in 2016, that was eliminated. Done away with.

Yeah.

So we don't have that. I think it was 2016. So around that year we lost that. So when you start in 20 or rather when you start filing at 62, that's your benefit.

And just as a refresher, you said that that's about a 30% reduction of what my full retirement age benefit would be.

It is a 30% reduction. Yeah. And that changes by 5% in your favor each year as you head back towards your normal retirement age of 67.

Okay. Okay.

So, if you waited till you're 63 to file, you're going to take about a 25% haircut and so on. So, yes, you are going to lock a lower amount. And so, if you live to be 90 years old, that probably turns out to be a mistake, assuming that Social Security is solvent, right, throughout those years.

Yeah, that's sort of the big what if, isn't it?

And I'm not here to solve that one. I just throw that caveat in.

Neither of us are because we don't know.

Yeah, we don't. And right now we have so many people signing on or qualifying for Social Security and we have so few in comparison paying into the system.

Yeah.

When Social Security was designed and when it rolled out, it was never intended to be a retirement vehicle. It was intended to replace a portion of final year's compensation.

Mhm. Mhm.

And so today unfortunately that system, when it started, Spell, just as a matter of reference, for one person drawing Social Security way back then in the 40s and 50s you had 7 8 n 10 maybe as many as 12 in some cases paying into the system for every one drawing.

Right.

Well today that number has been reversed in a huge way.

Yeah.

So no wonder the system is in trouble. Not to mention some of our leadership thought it made sense to borrow from the Social Security fund like it was a slush fund and it never got repaid.

Right. Right.

That's a different conversation. But I think Social Security is in trouble for sure. But if it last and you took it at age 62 and you lived age 90, it's probably a mistake. You're going to give up a lot of money in that case.

Yeah. What does it do to my wife in that example I told you? I'm 62 and my wife is 53. What happens if I die first? What does that do to her?

Well, it's going to eliminate some of her benefit because you're going to lock into something. You're going to change the trajectory of your Social Security and so it could affect your wife's benefit to be sure. Now, in some cases, what we see today, you see a lot of spouses, wives that make a lot more money.

True.

So their insurance amount or their Social Security benefit could be substantially higher. So, it may not affect them at all. Their benefit might be so much more they wouldn't file on their spouse in the first place.

Yep. Yep. Okay. So, Phil, my kid's a sophomore. How many years of this do I get?

Well, if he's a sophomore, she's a sophomore, you got a couple years.

Yeah.

Likely.

Yeah. Now, probably two, maybe three.

Age. Maybe three depending on age. So if this child has finished school and they happen to finish when they're 18 and they're out, then benefit's over.

Yeah.

If they're still in school, then they're still considered a minor through age 19.

Okay.

So if they are still getting educated, so to speak, then that benefit will continue.

Yeah. Yeah.

But at no point should it go beyond age 19. I gota it's going to stop there.

Phil, do you think that someone listening, maybe they find themselves in this situation where they're able to file for Social Security, they've qualified, they have the number of credits they need, and then say they wanted to sit down tonight and pull out the calculator and say, "Does this make sense for me?" Would you recommend, or do you think that that's easy to do or possible to do?

Yeah. Yeah, it's possible, not probable.

Okay.

Right. I think there's a lot to think about here, or I believe there's a lot to think about. It's not as simple as deciding how much are my kids going to get.

Yeah.

That calculation is not overwhelming. There's quite a bit to it, but you can go to the Social Security website and find the formula and you could do it.

Mhm.

I think the part that gets missed a lot is how old are my children? How many years are they going to get this benefit?

Mhm.

What does the reduction mean to me if I'm still working, for example, and I'm earning a good income and I'm going to lose a dollar for every $2 that I earn. So, I'm going to lose 50% of my Social Security.

Yeah.

That's a huge amount of money to be lost potentially.

Y.

And if my children are going to get whatever they're going to get, let's say they're going to get $1,000 each, so they're going to get $24,000. But if they are only 2 years from the benefit ending, do I want to lock my Social Security at a 30% discount permanently for the rest of my life?

Right. Permanent.

Do I want to lock that for my kids to pick up $48,000? Maybe.

Yeah, maybe.

But those numbers need to be considered, right? Because this is a permanent decision. This isn't something you can revoke or get a do-over.

Yeah. Right. It's not that easy. Not that flexible.

So I think yes, they could do some of the calculations. I think it's far easier if you have someone that you know, like, and trust that has the technology to do it. Whether that's our firm or a firm like ours that has that ability.

Y.

I think best to turn to a professional and let them run the numbers to see if this makes sense.

Yeah.

Well, there's so many variables to this equation. This is not a one variable or two variable or three variable equation. This is a multivariable equation. You're talking about the rest of your life.

Yeah.

And if you live 10 years, 15 years, 20 years, 30 years, right, Spell, we have, as well as anyone, we have plenty of clients that are well into their 80s, some in their 90s, some pushing 100.

Yeah.

So to take a 30% discount—

Mhm.

—and your child has a year or two, that bath may not work so well.

Right. Right.

We really need to do the calculations to see if this thing would make sense.

Yeah.

I think there are situations where it does. If you happen to be one of those late bloomers and you married a beautiful young lady who is still in her childbearing years, you happen to be 50.

My dad did it.

Yep. And you're only 10 or 11 years old and your mother or father can qualify for this, that might be a good idea.

Mhm.

But again, need to run those numbers to be sure.

Yeah, for sure. Why has no advisor mentioned this to me?

Well, it's hard to say, but I can tell you that it's unlikely for advisers to talk about it because most people aren't going to qualify for this, Spell. Less than 1% of our population would likely qualify for something like this.

Yeah.

So, it's probably not on the radar because you're not going to qualify for it.

Yeah. As a financial professional, we obviously help people enroll in this type of thing all the time. Maybe less with their children. That is a pretty rare thing. But what's someone at home need to know if they're going to enroll in Social Security? What do they need to know?

Well, I think if it involves minors, if you're trying to get, if you're enrolling because you want to qualify your children so they get a benefit, just know that this is not a phone call kind of deal. You're going to set an appointment, okay? You're going to meet with someone, you're going to have documentation for your child. There's a lot of proving ground, so to speak. So that burden of proof is on you and you've got to deliver it.

Okay?

And you're going to do that in person with a representative. So this is not a standard Social Security enrollment.

No, you've done it with clients, Spell, but you weren't doing it for their minors.

No. And so you'll set, right, so you'll set a call and you'll work on that client's behalf and then get on the call with the client with Social Security and you get everything done over the phone.

Sure. Sure. Pretty simple.

Is that a common thing for advisors to do? Help enroll their clients in Social Security?

No. That's uncommon.

Well, it takes time.

Okay.

It is not something that a lot of advisers are experienced in doing. And frankly it takes them away from what they really want to do, which is go find the next deal so they get paid. I think a lot of times people work with so many people they don't have time to do that.

Yeah.

Or they want to go do something else.

Sure.

It's a value added service. I know very few firms that do that. I definitely have some friends in our profession. They would do those kinds of things. I wouldn't say we're unique, but not many firms are going to take that kind of time to go help a person get enrolled in Social Security, but that is part of our deliverables. It is part of the kind of planning that we embrace here.

Yeah. So yeah, that may be uncomfortable for some listeners to hear because they may have enrolled in the Social Security program on their own and probably got frustrated, and they may have gotten frustrated because not always the easiest thing and you can maybe find yourself sitting on hold for quite a while.

Yeah.

But for someone who might be frustrated saying, "Well, gosh, if there's advisers out there who are willing to do this for their clients, why didn't mine?" What do you say to that?

Well, I say you have to decide what do you want in a relationship. You're paying an advisor and generally if you're paying them for a full-service relationship, you should get that.

Yeah.

Now, I'm not saying that every adviser should do it. You gota, you do what you do for your business, and so I say to any adviser out there, you do what's right for you. For us, it's always been, you look at our vision and our mission, it's all about relationship and it's all about stress-free environment. And so dealing with Social Security can be stressful.

Yeah.

And we just always try to take that out, and we don't do it for every client, but for our top tier clients, if they want our help, we're happy to do it. And so it's a little value add, a little perk.

Yeah.

And we think it adds value. That's—

We'll get right back to today's show, but first I'd like to ask you a quick favor. If you're enjoying this episode, hit that like button and make sure that you're subscribed to our channel so you don't miss what's coming next. And hey, if something in today's episode has you wondering about your own financial plan, why not get a second opinion? Visit omnistarfinancial.com to schedule a consultation with one of our team members. It's quick, it's easy, and it could make a huge difference in your financial future. Now, let's get back to the show.

What's the one question somebody sitting at home should go ask their CPA right now?

Am I getting all of my deductions that I qualify for in 2026? And I think so many people fail to ask their CPAs questions, period. They hand them all the stuff or email it to them or drop it in the portal and they assume everything is good. They're not asking questions about deductibility. They're not thinking about specific elements of the tax code that can benefit them. So I would just tell people, when you have a conversation with your CPA, get specific.

Give me the exact words. Give the listener the exact— what's one, if you had to do in one sentence, what should they ask their CPA?

Am I getting all the deductions that I should? And one in particular that's fairly new: whether you itemize or not, there is a specific deduction for a charitable contribution. Most people are under the assumption that whatever they give to charity is not going to affect their tax rate unless they go over the standard deduction, which is huge, and I can understand where that confusion comes from. But there is a new deduction that everybody gets whether you qualify by way of that standard deduction or not. So if you don't go over the standard deduction, you still get this. Okay? Ask your CPA, are you putting that on my tax return? If I'm giving to charity, am I seeing that

as a way to deduct a little bit more? Okay, that will help me maybe save a little bit of tax. Okay.

All right, 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 came out last week and Spell, I've been at this a long time. I believe that it is always a good thing to look for opportunities to understand the tax code and to understand all of the moving parts as much as you can so that you are equipped to take advantage. I think that the very people who complain about our tax code or complain about benefits that they don't get, it's the people that are uneducated in that realm.

Got it.

So, I believe that people should be educated. They should know as much as they can and when they don't, they should turn to professionals that can help them sort the details such that it gives them the best outcome.

Okay.

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.

Sure.

Anyone that all of a sudden sees a 529, something that they've probably never thought about because if they don't have children, they're not thinking about college planning. They're probably not going back to school, right? They're in their career. They're fine. They might go back to school, but suddenly someone says, "Oh, well, buy a 529 plan or fund a 529 plan because you got this new built-in advantage." 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 a... Yeah, I don't think it's an advantage.

All right. Explain the rule first because we haven't really gotten into the meat of the article yet. But with a 529 account, and by the way, this is not new. So the fact that it was on the Bloomberg terminal last week is a little surprising to me because I think it was portrayed as a, oh, new and improved kind of thing. I haven't been in the business long and I've been talking about this with clients for years, years. 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. 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, up to $35,000 could be rolled into a Roth IRA.

Mhm.

So long as that Roth IRA was in the name of the beneficiary of that 529 plan.

Okay.

And so that opened a new way of thinking for a lot of people because many times we would get the question, what happens with money left in my 529 plan or in my child's 529 plan?

Sure.

And the answer was always, well, one, you don't want to overfund it. So, try to avoid doing that. Try to spend through it as much as you can. Use it for the right things for your child. And then if you have another child, when one's finished, switch the beneficiary and use the remainder for that child. That assumes they had more than one child.

So, the question though was always, well, what happens if there's money left? And the answer was, well, it's your money, right? You're the custodian, if you will, of that account, and you set that account in motion for the benefit of your child or whoever you name as a beneficiary. You can take the money, okay? You're going to pay some tax on it. If there's gain, then that money is going to be taxed. And then you're going to pay a 10% excise tax for pulling that money out.

Yep.

So this Roth idea, when the government came back with that in SECURE Act 2.0, they said, hey, no fear, no worries here, you can take that money up to 35,000 and move it to a Roth for the benefit of that 529's beneficiary.

Okay.

And so that was a move in the right direction.

Sure.

Right. So that's how we got to the point of this kind of article coming out, because all of a sudden people are trying to turn this into something much bigger than it really is.

And 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 minimum of five years.

Yep.

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

Yep.

So if you put that 529 in place, it's been there for the 15 years, fine. But if you funded it three years ago, well, you can't roll to a Roth. Sorry, just can't do it.

Yeah.

Or let's say that you decided to just dump as much money as you could into a 529. There are certainly some pretty high limits for that. But let's say that you did that, but you just did that three or four years ago, and now you want to start rolling to a Roth, well, you can't do it.

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

15 and five.

That's a good numeric to remember. So, if I roll money out of a 529 into a Roth, is that money going on top of what I've already contributed to my Roth for the year?

If you have money in a Roth and you move this money into the Roth, then absolutely it's going on top of what's already in the Roth. Okay? It is not opening the door for an additional contribution.

Uh-huh.

A lot of people are confusing that when I'm reading these articles out there. Now, once I saw this Bloomberg article, you know me, Spell, questions start rolling around and I start researching, and there's a lot of articles floating around out there where people think this is expanding what they can put in a Roth every year, right? Not the case.

So, it's not a loophole, like, 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 under 50 years old, okay, you can do in 2026, you can do $7,500 to a traditional IRA or to a Roth IRA, right? Not 7500 each, right? $7,500 total. You can put 3750 in a traditional IRA and 3750 in a Roth IRA in the same year.

That's $7,500.

Yes, it is. You can't do 7500 each. Number one. And then 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, because 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.

Yep.

So you are rolling it from one to the other, but it is a contribution in that if you're already putting $7,500 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 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 7,500. 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. This is a couple people that wrote an article. I'm not going to mention their names, but I know where they're going with this, right? The guys, this is all about how do you get more money into your Roth, and hey, all these adults are buying 529 plans or funding these plans with the intention of never using it for education. The intention is to then have a way to get another $35,000 into a Roth.

Well, 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? Or I'm planning to go back to school, and I'm going to make me the beneficiary, which I would do when I open the account, right? And so maybe I'm going to use some of that money, okay? But if those things don't exist, or maybe there's somebody else in my family I want to potentially fund some of their college maybe, or private school or whatever it might be.

Yep.

Short of those things, 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? 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.

You're stealing some of my thunder here, Phil. You're taking my questions away. But, hey, roll with it.

Well, it's just so funny to listen to these articles, or to read these articles.

Yeah.

Because I think a lot of times I read, and don't get me wrong, we love Bloomberg. We use, our Bloomberg terminals are great.

That was what I was going to say. We can't really fault Bloomberg for this because it was just an article on the platform, just on the terminal. They weren't endorsing it.

No. Right. They take... We can send material to them all day long and chances are someone's going to read it. They're not...

And that's why they have disclaimers, by the way.

Exactly. Right. They have those disclaimers that say we're not necessarily endorsing any of this. But I think in this case, someone's trying to turn a 529 into something that it was never meant to be.

Mhm.

I do believe that this Roth conversion tool is great when you have a child that goes to school and the 529 gives them a lot of tax-free distribution. If it's grown for 15 years or however many years and they've got this great tax-free distribution, they get to fund some of their college. That's awesome.

Yep.

And if there's 35,000 left or something like that, move it to an IRA or to a Roth IRA. What a great way to start.

No kidding.

For your saving for your future.

Oh, for sure.

But even that child, when they finish college, if they're going to start moving 35,000 from the Roth, or excuse me, from the 529 to the Roth, got to have earned income.

Yep.

They got to be working.

Yep.

And they have to be the beneficiary of that 529 and they have to be the owner of the new Roth account.

Yeah.

And so all that is good, but that doesn't make this article any more truthful about this being a loophole.

Yeah. Because it's really not.

No, it's not a loophole. You can't stuff more money into something when there's limiters on it. And there's lots of limiters on Roth, by the way.

Yes, there are. Yes, there are. You mentioned that you can change the beneficiary on a 529 account.

If you do, does that reset the 15-year clock? Lot of debate. Lot of debate about that. I can't tell you definitively because that's been up in the air for a while.

Okay. Some people say that it does.

So you don't know. Some people say it doesn't. You don't know.

Well, if the federal government hasn't spoken on it, how do we know? So nobody knows. Nobody knows. It's been a debate. Some people say they'll take the chance. What I would tell you is go down that path. And if you don't believe it sets a 15-year clock or if the administrator of that plan doesn't believe it, have them put it in writing.

Yeah.

Right. Somebody needs to give you something in writing to say it either does or it doesn't.

Yeah.

And to my knowledge, there's nothing out there that does that. But that 15-year clock, when you switch the beneficiary, maybe starts over, maybe not. But even if that clock doesn't start over, I don't think it makes this any more of a benefit than it was when we started our conversation.

Yeah. Yeah. 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. 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, back door.

Yep. So they've got the back door off. What's left?

I think there might be one. There might be a couple of reasons, okay? Why somebody would do this. Let's speak to the high earner first.

Okay.

Let's say that this high earning person, they've been accumulating dollars and maybe they have some IRAs laying around. Okay, and they want to do a back door. Well, if we do a backdoor to their Roth IRA and they have traditional IRAs, they're going to get hit with pro rata, right? And the pro rata rule, that's another show. In fact, maybe we did a show on pro rata.

But the pro rata rule basically says that if I have an IRA, traditional IRA, and I'm trying to move money in that backdoor way to a Roth IRA, every time I do that, there is a calculation that must be made. And depending on the total value of the traditional IRA and the amount that I just put into that traditional IRA, they're going to take that number and with a little simple math, we're going to decide that the largest portion that I'm trying to move to that Roth is going to end up being ordinary income taxable.

Yep.

And so I'm not going to get the back door that I thought I was going to get because of the pro rata rule.

Okay.

There is a loophole with the 529 that could make sense here.

Okay.

For someone in this case, and I think this is a lot of work for a little bit of payoff.

Okay, let's hear it.

Let me caveat with that.

All right.

There is a little known loophole in the 529 in this new rule with this $35,000 amount that can be moved to a Roth. It avoids the pro rata rule. And so if I have 35,000 and I want to try to move that 35,000 to my Roth each year, as long as I have the earnings, and as long as I have not exceeded my $7,500 amount, and let's assume I've done zero to my Roth—

Yeah.

—I can move 7500 or if I'm over 50, I can move 8,600.

Okay.

From the 529 direct to my Roth and it does not cause an issue with pro rata. So in other words, pro rata will not affect it. So I can go direct to the Roth. I'm not going to say that's a reason to go open a 529.

Sure.

That's the only good reason to do it for a high earner. Otherwise, why would you do it? Because that is a headache for that little bit to get into the Roth.

Well, it's a headache definitely and for a high earner, maybe there's not a 529 plan that's been opened yet. You've got a 15-year clock. You said 15 and five. That was the numeric that we needed to listen to.

That's right.

So, 15 years of that money has to be or that 529 has to be established.

Yep.

The contributions to that 529 have to be at least five years old before you can move them into the Roth environment. That's a lot of time to wait for your money to not already be in the Roth, earning money tax-free in the Roth.

You'll get no disagreement from me. I think this article, it exposes a couple of things. One, it exposes the very idea that creating new ways of doing things, right, is alive and well.

Yeah. But it doesn't mean they're valid.

Doesn't make them good.

Yeah. Doesn't make them real.

And I would tell you that most people who read that article, they probably walked away thinking, "What a cool idea. I'm going to open a 529. Woo." Now, I've yet to come up with a really good reason. There might be one.

Mhm.

There are a few states that clearly tell you you cannot deduct dollars going into a 529. You get no tax benefit.

There are some that do, but there's quite a few that do. You're right about that.

And if you live in one of those states and you wanted to fund a 529—

Yep.

—to get your 35,000 in the 529, you do it with tax-deductible dollars and then you move it to a tax-free investment. Okay, maybe that makes sense. But again, Spell, 15 years you got to wait to do this. Who knows what the laws will be by the time you can do it.

True.

Might be a waste of your time.

Could be.

And then you got to have the money in there for 5 years. But if you could do that, then I would say, "All right, maybe you've got my attention."

The classic maybe.

It's still a maybe for me. But the other thing is if you live in a state that doesn't have income tax, who cares?

Yeah.

Right. No benefit there. But if it's a state that allows you to deduct it, some states, by the way, have limits on what you can deduct. Some unlimited.

Yep.

Know your rules.

Yep.

I don't know all the states, but I can tell you that North Carolina, where we live, does not allow a deduction.

Nope.

So, you put money into a 529 after tax, but if that existed, you were in a state where you could deduct it and it helps you in your taxes. That's rule one. You pass that. Then maybe we go to step two or rule two, which is can I fund this thing and does it make sense for me to wait 15 years?

Yeah. Probably never going to know the answer, but—

So now you fund it. 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 and 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. Maybe.

But so I would have to say if I were looking at this thing scale of one 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.