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In the past decade alone, college tuition costs have increased by a whopping 36%. With no signs of slowing and current costs rising at more than twice the overall inflation rate, the best time to start saving for higher education was yesterday. The second-best time is today.
If you're a parent and need to start saving for your child's college education, there are two popular options. However, which one is the best? Today, we're looking at 529 plans vs Roth IRAs.
A 529 plan is specifically designed to save for college costs and graduate school. Annual distributions of up to $10,000 for K-12 tuition are also allowed, and you can contribute an almost unlimited amount for college.
529 plans are administered by individual states, although you don't have to stick with your state's plan. A Florida resident can invest in a California plan or vice versa. Most 529 plans are investment accounts, but a few states also offer prepaid tuition plans. Most people don't opt for this route.
A Roth IRA is technically a retirement account. However, there are some benefits that make it a great vehicle for college savings, particularly if your family wants flexibility in how it uses the money.
If you're not sure which type of college savings account is best for you, here's an in-depth look at how the two compare in terms of investment options, contribution limits, withdrawal rules, and more.
Roth IRAs and 529 college savings plan contributions won't give you a tax deduction this year, although some states offer incentives to residents who invest in their 529 plans. One of the biggest differences between the two accounts is how distributions work.
With a 529 plan, you must use distributions for qualified college expenses as defined by the IRS. Otherwise, you'll owe a 10% penalty plus income taxes on withdrawals.
Qualified expenses include the following:
Some costs related to attending college don't qualify, including the following:
You can withdraw your Roth IRA contributions for any reason whenever you want with no taxes or penalties. But the account earnings are usually subject to income tax plus a 10% penalty if you withdraw them before age 59 1/2 or before you've had the account for five years. You can avoid the 10% penalty, but not the tax bill, if you use the earnings toward qualified education expenses.
Saving for college in a Roth IRA may make sense if:
Some downsides to using a Roth IRA:
A 529 plan is a better option than a Roth IRA if:
The downsides to a 529 plan include:
The following table provides a brief summary of some of the key rules relating to Roth IRAs and 529 plans for college education.
Your investment options in a 529 plan are limited to a selection of mutual funds. While some plans allow you to craft your own investment strategy by choosing the funds you'd like to invest in, most families opt for target-date funds, which gradually shift to more conservative assets as your child gets closer to college.
A Roth IRA gives you the freedom to invest however you choose. You can invest in any stocks, bonds, exchange-traded funds (ETFs), and mutual funds that appeal to you. However, if your child will need that money for college in the next few years, it's essential that you avoid high-risk investments. Exposing yourself to too much risk could leave you without enough money to cover the full cost of a college education.
You are the only person who can fund your own Roth IRA (with the exception of spousal IRAs). However, anyone can contribute to a 529 plan: grandparents, aunts and uncles, family friends, etc.
Many plans have gifting platforms that make it easy to ask for contributions. For example, you could give friends and family the option of giving to your child's 529 plan as a birthday gift.
You can contribute as much as you like to a 529 plan, regardless of your income. These plans do have aggregate limits, but they're high, ranging from $235,000 to $575,000, depending on the state.
For 2025, Roth IRA contributions are limited to $7,000 per year, or $8,000 for savers older than 50. These contribution limits increase to $7,500 and $8,600, respectively, in 2026. Income limits also apply. (There is a complicated "backdoor" method of contributing for higher-income people, though.)
Your 529 savings will count as parent-owned assets if your child fills out the FAFSA to get financial aid. That means they could lower the amount of aid your child receives, although the impact is minimal. At most, parent-owned assets reduce the award by 5.64%.
Roth IRA savings don't count as assets on the FAFSA, so they won't affect your child's financial aid. However, Roth IRA withdrawals do count as income, even if you limit them to your contributions.
Income is weighted much more heavily than assets for financial aid. Roth IRA distributions could reduce your child's award up to 40-50%, depending on income and number of dependents.
However, the FAFSA looks back on tax returns from two years prior to calculate financial aid. For instance, aid for the 2026-2027 school year is based on 2024 tax returns. If you can wait until the last two years of your child's college career to take a Roth distribution, it won't affect any potential financial aid arrangements.
At first glance, Roth IRAs seem to win on flexibility. After all, if your child doesn't go to college or needs less money than you expected, you can always use the funds for your own retirement.
But 529 plans offer some flexibility, too. You can change the account beneficiary to another family member if your child doesn't need the money. The 10% penalty also may not apply if your child earns a scholarship, attends a military academy, becomes disabled, or dies.
If you're still not sure whether a Roth IRA or a 529 plan is a better choice for you, you can always use a combination of the two.
One strategy financial planners often recommend: Max out Roth IRA contributions first, and then invest additional funds in 529 plans for your kids. If you have the resources, there's no reason not to contribute to both a Roth IRA and a 529 plan. Your kids will thank you when they graduate without the crushing weight of excess student loans.
