529 Plans Outperform the Alternatives
A 529 account is better than a child Roth IRA.
A Roth IRA is a fantastic retirement account. While in many situations a “second best” account to the 529, setting up a Roth IRA for a child does not usually exceed the 529 benefits (see chart on page 98).
To initiate a Roth IRA, the child must have documented earned and taxed income. Deposits do not qualify for any state or federal deduction or credit. Only 1 Roth account is allowed per person with a maximum 2026 contribution of $7,500, vs unlimited 529 accounts from grandparents or others. Post tax contribution money is used and growth is tax deferred until age 59 ½ when it becomes tax free.
The account will be controlled by the young adult for any purpose beginning age 18. As long as there are no withdrawals, there is no Roth IRA SIA impact.
A benefit of the Roth IRA compared with a regular IRA account is that original contributions may be separated from earnings and withdrawn tax free at any time, including for K-12 expenses. Most interest withdrawals would require taxation and a 10% penalty.
Penalty free situations include (income taxes may be owed on earnings):
- Some qualified college or vocational expenses.
- First-time home purchase up to $10,000.
- Birth or adoption qualified distributions up to $5,000.
- Medical bills exceeding 7.5% AGI.
- If the beneficiary were to become permanently disabled.
Since the SECURE 2.0 Act of 2022 allowed a 529 Roth rollover, the child Roth has lost one of its biggest advantages over a 529 account. The 529 now touts advantages on contributions, similar tax free growth, and more options for education-related withdrawals. It then converts seamlessly to a Roth without penalty up to $35,000 or continues to be available tax free for licensing, credentialing, or other educational purposes prior to retirement age.
No statement or example on this site should be considered a specific recommendation for your personal situation. Investing and tax strategies each carry significant risks. Examples herein may not apply to your situation. Please consult your estate attorney, tax advisor, or financial advisor for personal advice.