College costs continue to rise, and so does the need to plan ahead. If you’re wondering how best to save, two popular options stand out: 529 college savings plans and Roth IRAs.
Both offer tax advantages, but they work in very different ways. One is purpose-built for education, while the other was designed for retirement, but can offer some flexibility for college expenses. So, how do you choose?
In this guide, we’ll walk through the key differences between a 529 plan and a Roth IRA for college savings, covering taxes, contribution limits, financial aid impacts, and more, to help you decide which (or both) might be the right fit for your family.
Tax benefits
529 Plan |
Roth IRA |
|
|---|---|---|
State Income Tax Benefits |
Over 30 states and the District of Columbia offer state income tax deductions or credits for charitable contributions. |
No state income tax deductions or credits available. |
5-Year Gift Tax Averaging |
Allows 5-year gift tax averaging up to $95,000 ($190,000 for couples). |
Not subject to 5-year gift tax averaging. |
Qualified Distributions |
Tax-free if used for qualified higher education expenses or K-12 tuition. |
Contributions can be withdrawn tax-free anytime; earnings are tax-free after 5 years and after age 59½. |
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Roth IRA
In a Roth IRA, the principal portion (the amount you put in) can be withdrawn tax-free and penalty-free at any time for any purpose. Earnings in the account grow tax-free and can be withdrawn tax-free and penalty-free only after you reach retirement age.
A key benefit of Roth IRAs is that distributions are not taxed as earnings until the entire principal balance is withdrawn. That means you can take out as much as you put in tax-free to pay for college and withdraw the earnings portion tax-free when you turn 59 1/2.
If you withdraw earnings from your Roth IRA account before you reach retirement age, you will be subject to income tax and a 10% penalty on the earnings.
There is an exception to the early withdrawal penalty if the funds are used to pay for qualified higher education expenses. However, you will owe income taxes on the earnings portion of the early distribution.
529 college savings plan
A 529 plan offers tax-deferred investment growth and tax-free withdrawals when the money is used to pay for qualified education expenses.
Qualified education expenses for 529 plans include:
- College costs such as tuition, fees, and room and board
- Up to $10,000 per year in K12 tuition
- $10,000 in student loan repayments
If you take a non-qualified 529 plan withdrawal, the earnings portion will be subject to income tax and a 10% penalty. Unlike a Roth IRA, every distribution contains an earnings portion and a contribution portion.
Residents in over 30 states can also claim an additional state tax credit or deduction for 529 plan contributions.
Income and contribution limits
529 Plan |
Roth IRA |
|
|---|---|---|
Annual Contribution Limits |
No limit. Contributions exceeding $19,000 ($38,000 for couples) in 2025 may result in gift taxes |
$7,000 per year (in 2025); $8,000 if aged 50 or older |
Earned Income Cap on Contributions |
No earned income cap |
Income cap applies Less than $246,000 (married filing jointly) Less than $165,00 (single) |
Aggregate Contribution Limit |
Limits vary by state, typically $235,000 to over $500,000 |
No aggregate contribution limit |
Third-Party Contributions |
Allowed |
Not allowed |
Investment Options |
Limited to static and dynamic portfolios |
Broad options, including stocks, bonds, mutual funds, ETFs |
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Roth IRA
In 2025, married couples filing jointly with a Modified Adjusted Gross Income (MAGI) less than $236,000 ($150,000 for individuals) can contribute the maximum amount of $7,000 to a Roth IRA.
Couples with a MAGI of $246,000 or greater ($165,000 for individuals) are ineligible for a Roth IRA. If you are over 50, you may also be able to make a catch-up contribution of $1,000 per individual.
Third-party contributions from friends, family, and others aren’t allowed.
529 college savings plan
Individuals of all income levels can enjoy the benefits of a 529 account. Moreover, there are generally no annual contribution limits, and deposits up to $19,000 ($38,000 for married couples filing jointly) will qualify for the annual gift tax exclusion in 2025.
If you’re looking to reduce your gift tax exposure through gifting, you can elect to spread a contribution between $19,000 and $95,000 over five years. This is a common estate planning strategy for grandparents who want to ensure their legacy is being put to good use.
529 plans have lifetime aggregate contribution limits varying by state, ranging from $235,000 to over $500,000.
Friends and family members can make contributions to a 529 plan, regardless of who owns it.
Effect on federal financial aid
529 Plan |
Roth IRA |
|
|---|---|---|
Financial aid impact (assets) |
Reported as an asset on FAFSA; may reduce financial aid eligibility by up to 5.64% if owned by dependent student or parent. |
Not reported as an asset on FAFSA. |
Financial aid impact (income) |
Distributions may count as income if account is not owned by parent or student, but generally not if listed as an asset. |
All distributions, including tax-free returns on contributions, count as taxable or untaxed income on FAFSA. |
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Roth IRA
Retirement accounts are not considered assets on the Free Application for Federal Student Aid (FAFSA), which means the value of your Roth IRA won’t hurt your chances for financial aid eligibility.
A Roth IRA distribution, however, may be reported as income on the FAFSA. If you take a taxable distribution, the taxable income is added to your adjustable gross income (AGI). Qualified distributions are reported as untaxed income.
529 college savings plan
The value of a 529 college savings plan, whether it is owned by a dependent student or one of their parents, is considered a parental asset on the FAFSA. When determining the Student Aid Index (SAI), only a maximum of 5.64 percent of a parent’s assets will be used to pay for college expenses.
This is much lower than accounts that are considered the student’s assets, which are assessed at 20 percent. Lower SAI means more financial aid.
Withdrawals from parent- or student-owned 529 accounts are excluded from federal income tax returns and do not have to be added back to base-year income on the following year’s FAFSA. Keep in mind that this favorable treatment also now applies to 529 plans owned by grandparents or other relatives.
Factors to Consider when Choosing a 529 or Roth IRA
There is no choice that’s correct 100% of the time between a Roth IRA and a 529. The right type of plan will depend on a number of factors, most notably:
- Do you want to be limited to paying for college with your money? Funds from 529 plans can only be withdrawn penalty-free if you use them to pay for qualified expenses related to your college education. Therefore, it’s essential to consider whether you’re certain your child will attend college or if you’d prefer to be free to use the funds for something else.
- How could you take advantage of the tax benefits? Roth education IRA plans offer competitive tax advantages. While 529 plans have their own tax advantages, it’s important to closely compare these to see which will benefit your situation most.
- How will it impact your eligibility for financial aid? Both 529 plans and Roth IRA for college savings may be counted on the FAFSA, which could have a minor impact on your child’s financial aid eligibility.
Is a Roth IRA better than a 529 plan?
A 529 savings plan is generally an all-around good choice to pay for your child’s (or your own) college, while a Roth IRA may be a better option as a backup account to supplement educational expenses.
The ideal approach would be to contribute to both a Roth IRA and a 529 savings plan, as this will provide the maximum flexibility to pay for your child’s college expenses in the most effective way and save for your retirement.
If you’re worried about having unspent funds in a 529 account, there’s good news. You can now do a tax-free rollover of funds from a 529 plan to a Roth IRA within certain limits, subject to meeting specific criteria.
