529 Plan vs. Roth IRA to Save for Your Kid’s College

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Do you plan to cover higher education costs for your children? With rising tuition costs, it’s pertinent to capitalize on every option that helps you grow the money you stow away. You also want to get a head start to ensure you have an ample amount of time to meet your college savings goals

Both 529 plans and Roth Individual Retirement Accounts (IRA) can help you maximize your savings, but which is best to save for your child’s college education? Keep reading to learn how they work, the benefits and drawbacks, how to choose the best option, and learn more about UNest as an alternative way to help save for your children’s future. 

Investment Account for Kids

What Is a 529 College Savings Plan? 

Also known as a qualified tuition plan, a 529 plan is a tax-advantaged savings plan that comes in two forms: 

  • Education savings plans: an investment account that can be used to cover tuition, fees, room, board and other qualified higher education expenses
  • Prepaid tuition plans: a plan that allows you to save money for tuition expenses in the future, but at today’s cost

Contributions to 529 plans are limited to $30,000 for married couples and $15,000 for singles. Any overages could result in the assessment of gift taxes. Furthermore, earnings on the funds in the account are not subject to taxation. The beneficiary can make tax-free withdrawals if the funds are used for eligible education expenses. Otherwise, ineligible withdrawals are subject to a 10 percent penalty. 

What Is a Roth IRA? 

A Roth IRA is a tax-advantaged account that allows you to accumulate earnings without paying income tax as contributions are made post-tax. When you reach 59 ½ years of age, you can make tax-free withdrawals and spend the funds however you please. 

But what makes it a viable option for college savings is the exception to the withdrawal rule. You can make penalty-free and tax-free withdrawals from the amount you contribute before 59 ½ if the funds are used to cover higher education costs. However, you could be subject to taxation if any amount you withdraw is from interest earned on contributions. 

The annual contribution limit is $6,000. If you’re over 50 years of age, you’re permitted to make an additional contribution of $1,000, bringing the annual contribution limit to $7,000. 

Advantages and Disadvantages of a 529 vs. Roth IRA for College Savings

Below are some of the primary advantages and disadvantages of using 529 plans and Roth IRAs to save for college: 

Pros and Cons of 529 Plans to Save for College

Key Benefits: 

  • Tax-deferred growth and tax-free withdrawals for eligible higher education expenses
  • Flexible use of funds for both K-12 and college tuition and fee
  • Secure today’s cost of tuition to save money in the future
  • Transferable to relatives of the beneficiary 

Key Drawbacks: 

  • Controlled by the state 
  • Limited investment options 
  • Prepaid tuition plans cannot be used for room and board
  • 10 percent penalty and federal income tax for improper use 

Investment Account for Kids

Pros and Cons of Roth IRAs to Save for College

Key Benefits: 

  • Tax-deferred growth and tax-free withdrawals for eligible higher education expenses
  • Flexible investment options 
  • Withdrawals permitted before 59 ½ for qualifying education costs
  • Not counted as assets by financial institutions and won’t impact financial aid eligibility

Key Drawbacks: 

  • Distributions are considered when the beneficiary applies for financial aid 
  • Lower annual contribution limit 
  • Earnings on contributions you withdraw before 59 ½ or have the owned the account for fewer than five years are subject to taxation (even if the funds are used for education)

Roth IRA or 529 Plans: Which Is Better to Save for College?

It depends on your goals and personal preferences. Roth IRAs generally offer more investment choices than 529 plans, but the contribution limits are lower. 

Unfortunately, Roth IRAs are not ideal for younger parents. Tax-free distributions for non-qualifying higher education costs cannot be taken until you’re at least 59 ½ years of age. Be mindful that federal income tax is only assessed on earnings – contributions are not subject to taxation. 

But if you want to save for other college expenses beyond tuition, a 529 plan likely isn’t the best option. But if you do go with this plan and are forced to use the funds on non-qualified expenses, you will incur a 10 percent penalty and pay income taxes on the earnings. 

Ultimately, 529 plans are designed to help save for college, and Roth IRAs cater to individuals looking to save for retirement. So, 529 plans could be the better choice between the two, with the Roth IRA serving as an alternative funding source.

Tax-Advantaged Investment Account: An Alternative to 529 Plans or Roth IRAs to Save for College

Would you prefer to look beyond 529 plans and Roth IRAs to fund your children’s education? Explore the tax-advantaged custodial accounts from UNest to determine if they are a more viable option. 

Choose from one of these plans: 

  • Regular: offers five investment options and cashback from leading brands 
  • Family: offers all the benefits of the regular plan and permits contributions for up to five children

Once you’ve decided on a plan and want to move forward, download the mobile app to your iOs or Android device. The college savings calculator on the dashboard can help you set a realistic savings goal. Enroll in a contribution plan, and you’re all set. You can also invite friends and family to contribute to your child’s account and manage your account on the mobile app. 

You can get started with monthly contributions as low as $25 and help your child avoid the added stress of paying for college in the future.

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