When it comes to saving for your child's college expenses, there's a good chance a 529 plan is the first tool you'll consider. The ability to pull out money tax-free for tuition and other costs makes these accounts a popular option.
However, college savings plans aren't the only way to save for higher education while catching a break from the IRS. Depending on your income, you also may be able to take money from a Roth IRA for qualified higher education expenses—without inflating your tax bill.
Which comes out on top in the 529 vs. Roth IRA matchup? Let's take a closer look at these two accounts and their key differences.
What is a 529 plan?
Aside from college costs, 529 plans also allow up to $10,000 a year to help cover K–12 tuition expenses. And
What is a Roth IRA?
Typically, you need to wait until you reach age 59½ and have owned the account for
Strategies for saving for college
What are the key 529 vs. Roth IRA differences?
Here are the top differences that you'll want to consider:
Contribution limits are significantly higher with 529 plans
The annual limit on contributions to a 529 plan is very high.
However, gift tax return may come into play for anyone who makes large contributions to a 529 plan. Couples filing joint tax returns can give up to $34,000 a year, and single filers can give up to $17,000 per year, before needing to file a gift tax return. However, 529 plans can receive up to five years of gifts in a lump sum. That would make the limits $85,000 to single filers or $170,000 for joint filers.
By comparison, Roth IRAs have a low per-year contribution limit. Unless you start saving far ahead of time, you may not be able to store up enough in a Roth IRA to completely pay for a four-year degree.
- In 2023, you can contribute up to $6,500 a year if you're younger than 50, or up to $7,500 if you're 50 or older
- In 2024, you can contribute up to $7,000 a year if you're younger than 50, or up to $8,000 if you're 50 or older.
Some families don't qualify to contribute to Roth IRAs
529 plans are not subject to any income eligibility.
However, Roth IRAs have income limits to participate.
- If you make between the maximum modified adjusted gross income (MAGI) listed, you can contribute but it will be a reduced amount.
- If you make equal to or more than the maximum limit listed, you can't contribute anything to a Roth IRA. If this applies to you,
see these alternatives.
|2023 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
|2024 maximum modified adjusted gross income (MAGI) to contribute to a Roth IRA
|Single or head of household
|Married filing jointly
|Married filing separately
Roth IRAs have a wider variety of investment options
With a 529 plan, the account owner can choose from a menu of investment options for growing earnings—typically a mix of
If you're looking for more involvement with your investment, Roth IRAs tend to offer options beyond funds, such as individual
Educational use withdrawals are more broadly defined with a 529
With a 529 plan, any amount you withdraw—whether it's your own contributions or investment earnings—is tax-free as long as it's used for post-secondary education expenses at any institution recognized by the U.S. Department of Education, whether it's vocational or collegiate. Up to $10,000 of the money even can be used for K–12 tuition expense every year.
With a Roth IRA your contributions come out first without tax or penalty and can be used for any reason, including for education expenses.*
State tax incentives may give 529 savers a boost
Both Roth IRAs and 529 plans have tax benefits at the federal level. But the contributions you make to a Roth IRA won't reduce your state tax liability.
With 529 plans, however,
Roth IRAs & 529 plans affect the FAFSA differently
Filling out a
A 529 plan owned by a dependent student or a parent is considered an asset, which
Roth IRA balances don't count toward your family's assets for the FAFSA. But it's important to realize that any amount you withdraw from a Roth IRA for college expenses will later qualify as income, and that may decrease financial aid eligibility. The FAFSA is based on your tax filings from two years ago, so waiting until the later college years to tap Roth IRA funds may help you reduce that impact.
529 plans vs. Roth IRAs for college savings at a glance
Limited number of mutual funds and target-date funds selected by the plan
Expanded investment options, including individual stocks and bonds as well as REITs
Yes, when used for qualified education expenses
For contributions, yes, at any time; for earnings, must meet requirements*
Aggregate (lifetime total) limits vary by state; may have gift tax considerations
For 2023, $6,500 a year for people younger than 50; $7,500 if you're 50 and older
For 2024, $7,000 a year for people younger than 50; $8,000 if you're 50 and older
Any U.S. citizen
You or your spouse must have earned income and meet modified adjusted gross income (MAGI) requirements
Most states with an income tax offer a tax deduction or credit for contributions
Impact on financial aid
5.64% of the account balance in excess of $10,000 counts toward the student aid index calculation
Account balance does not count as an asset, but withdrawals are classified as non-taxable income or taxable income on FAFSA depending on if the funds withdrawn are contributions or earnings. This may reduce financial aid on later FAFSA applications
Is a 529 plan or Roth IRA better for college savings?
While Roth IRAs offer more investment options, they also have a few more strings attached than 529s. State-administered college savings plans are available to all people regardless of income levels, have much higher contribution limits and can be used for expenses beyond higher education. This makes them a sound choice, but Roth IRAs shouldn't be discounted. Roth IRAs have more investment choices and won't count toward your assets under the FAFSA—plus any unused money still can be used for your own retirement.
Every family and student preparing for post-high school education expenses has different needs. A