As a parent, setting aside money for your child’s higher education could be an important part of your ongoing financial strategy. The 529 and Roth IRA are two types of tax-advantaged plans that you might want to consider as you prepare for your child’s future.
A new provision in the SECURE 2.0 Act, allows families the option to roll over up to $35,000 in unused 529 plan funds into a Roth IRA. Offering a new way to repurpose education savings into retirement savings. Understanding the differences, benefits, and limitations of each option can help you choose the right path for your family’s financial goals.
What’s the difference between a 529 plan and a Roth IRA?
While both the 529 plan and Roth IRA offer tax advantages and can be used to support your child’s education, they differ across several key categories. These differences can impact how and when you contribute, what expenses you can cover, and how withdrawals are treated.
Tax benefits
The primary tax benefit of a 529 plan is that investment earnings grow tax-free. Withdrawals used for qualified education expenses, such as tuition, books, and even up to $10,000 per year for K–12 tuition, are also exempt from federal tax. You won’t receive a Form 1099 for contributions, since they aren’t taxed, and you’ll only report earnings when you begin making withdrawals. However, if you spend the money on things that don’t qualify, you’ll have to pay taxes on the earnings and an extra 10% fee.
Roth IRAs, while designed for retirement, can also be used to fund higher education. You don’t get a tax break when you make a contribution because that money has already been taxed, but your funds can grow without being taxed later. You can withdraw your contributions at any time without taxes or penalties. If the account has been open for at least five years, you can also withdraw earnings tax-free for qualified education expenses, even if you’re under age 59½. This makes the Roth IRA a flexible option, since the money can remain in the account and continue growing for your retirement if your child doesn’t need the funds for school.
Contribution limits
Contribution limits are one of the key differences between 529 plans and Roth IRAs. 529 plans do not have annual contribution limits set by the federal government, but contributions are generally capped by states – often exceeding $300,000 per beneficiary over the life of the account. In contrast, Roth IRAs have strict annual contribution limits set by the IRS. For 2025, the maximum contribution is $7,000 (or $8,000 if you’re age 50 or older), and eligibility to contribute phases out at higher income levels.
Investment options
529 plans and Roth IRAs differ in investment options mostly due to their intended purposes and regulatory structures. 529 Plans are education-focused savings accounts. Investment options are typically limited to a set of portfolios chosen by the plan administrator. You can’t invest in individual stocks or a wide range of funds. Roth IRAs have a much broader investment flexibility. You can invest in a wide variety of assets, including individual stocks, bonds, mutual funds, ETFs, and even real estate.
Impact on financial aid
If you’re a college student, having a Roth IRA won’t hurt your chances of getting financial aid because it’s not counted on the FAFSA form. But if you take a distribution, that money could count as income, and this could affect how much aid you get.
On the other hand, 529 college savings plans are considered part of a parents’ assets, even if the account is in the child’s name. But only a small part of that money is used to figure out how much aid a student can get. When you withdraw money from a 529 plan to pay for college, you don’t have to pay federal taxes on it, and it won’t affect your financial aid for the next year. That’s why many families like using 529 plans to save for college.
How does a 529 plan work?
A 529 plan is a simple way to invest money for later and watch it grow. Your accounts are managed for you, so you can basically just set it and forget it. There are two types of 529 savings plans to choose from:
- Prepaid tuition plan: With a prepaid tuition plan, you can purchase credit toward tuition and fees at a participating college or university. Prepaid tuition plans are sponsored by state governments and require that you be a resident of the state to invest in their prepaid plan. That does not mean your student has to attend school in that state. Your prepaid investment can still be used to pay tuition for out-of-state institutions as long as they participate in the 529 program.
- Education savings plan: An education savings plan lets you open an investment account to save for tuition, mandatory fees, and room and board. Withdrawals from education savings plan accounts can generally be used at any college or university.
How does a Roth IRA work?
A Roth IRA can be used for more than just retirement. There is no federal or state income tax deduction for your contributions, but once your IRA has matured for five years, any withdrawals you make on the principal are tax-free.
Can you convert a 529 to a Roth IRA?
Under certain circumstances, you can convert a 529 to a Roth IRA. There are several reasons why you could have unused funds from a 529 plan, like if your child decides not to attend college, or if they receive a scholarship or other financial aid. The SECURE 2.0 Act lets you move up to $35,000 from a 529 college savings account into a Roth IRA without paying taxes or penalties, but the 529 account must be at least 15 years old, and you must follow the annual Roth IRA contribution limits.
Additional tax considerations when comparing a 529 vs. a Roth IRA
When looking at the tax benefits of a 529 plan compared to a Roth IRA, it’s easy to see that both have their advantages. A 529 plan lets your money grow without taxes, and you can take it out tax-free for approved education expenses. A Roth IRA gives you the option to use the money for both school costs and retirement savings. But there’s nothing that says you can’t fund both. You might use the 529 plan for college expenses and keep the Roth IRA for any extra costs or retirement savings. This way, you can support your education and still save for the future.
