College: 529 Plans vs. Roth IRA

The price of a four-year college education today does seem astronomically high after decades of the cost of attendance increasing faster than the general inflation rate. Yet despite this, for the vast majority of young adults the cost of higher education will still be lower than the cost of not having one.

Studies show that non-college grads tend to earn less over their careers than college graduates, while also occupying jobs that are more vulnerable to displacement by technological developments and economic downturns.

For those young adults who do enter college, many will enter the workforce after graduation crushed by six-figure amounts of student debt, and with earnings that leave them barely able to make ends meet. While the benefits of higher education are too numerous to quantify, the costs are not.  

To help young adults avoid the dilemma of having to choose between too little education or too much student debt, it is important for parents to plan ahead for college expenses. For most families, the “pay as you go” approach is just not realistic.

Two of the more popular options for college planning are the Section 529 Plan and the Roth IRA. These accounts are similar in a few ways. In both cases, the earlier you begin saving, the less burdensome the effort will be. Also, after-tax money is put into an account to grow tax deferred and to be distributed free of income tax and penalties as long as the money is used for qualified educational expenses at eligible institutions, such as tuition, books and room and board.

While there are similarities between the two options and every parent must consider their particular circumstances, in most cases, the 529 plan is the superior choice.

Some of the reasons include:

529 plan money can be used tax– and penalty–free to pay for K–12 education

Under the new tax law, you may distribute up to $20,000 per child per year to pay for qualified educational expenses prior to college without tax or penalty. In comparison, Roth IRA money is only free of the 10% penalty for “higher” education expenses, defined as post-secondary education.

The Roth IRA is a very limited savings vehicle

When your children attend college, your Roth savings are unlikely to cover the entire expense.

In 2026, the annual IRA contribution limit is $7,500, with an additional $1,100 catch-up contribution beginning at age 50, and you are only eligible for a direct Roth contribution if you don’t exceed certain income thresholds. In 2026, for single filers that threshold is 168,000 and for joint filers it is 252,000.

By contrast, the maximum annual amount that can be put into a 529 plan in 2026 is $19,000 per parent, per child. In other words, you may be able to save a total of $90,000 per parent per child in one year. In addition, unlike a Roth IRA, you may add money to a 529 plan account regardless of your income level.

The Roth IRA is too “expensive” for college planning

The media has us accustomed to thinking of costs only as fees. However, costs also include any opportunities lost when making a particular decision. If you use Roth IRA money to pay for college, you are losing future tax–free growth on this money that you could use for tax-free retirement income. 

Planning ahead for college expenses is important but there are some complexities down the road of which you should be aware:

• For financial aid purposes, the Roth IRA assets are excluded from many financial aid eligibility formulas. 529 plan assets are included, but they tend to be discounted heavily. Typically, 529 assets count against a financial aid applicant at the rate of $5.65 per $100 in the account or 5.65%.
• If one of your children doesn’t attend college, the money in their 529 account can be used for any of their siblings’ qualified educational expenses by changing the beneficiary on the 529 account.
• If none of your children choose college, there is a list of qualified relatives you can select in place of one of your children, including but not limited to, first cousins.
• If your child wins a scholarship, there is a limited exception which allows an amount equal to the scholarship to be withdrawn from a 529 account for any purpose without the 10% penalty otherwise applicable. You would, however, still owe income tax on the earnings and growth in the account.

In summary, while planning for the future involves the risks of the unknown, you can bet that higher education is worth the price and for most people the 529 plan account is the better savings vehicle for planning to meet those skyrocketing educational expenses.