Which Is Best for College Savings: 529 Plan or Roth IRA?

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

Income tax benefits

You can’t claim a federal tax deduction for contributions to either a Roth IRA or a 529 plan. However in the case of a 529 plan, you may be able to claim a state tax deduction or credit on your contributions if you live in one of the nearly 40 states that offer this benefit.

Gift and estate tax benefits

Contributions to a 529 plan are considered gifts for tax purposes. For tax year 2025, contributions greater than $19,000 (or $38,000 for a married couple), could require the contributor to file a gift tax return.

However, you can make larger contributions to 529 plans using 5-year gift tax averaging. For families that have the means, this makes 529 plans more advantageous than Roth IRAs for saving for college, since you can save larger amounts at one time while reducing the size of your estate.

Qualified distributions

Your earnings in both a 529 plan and a Roth IRA grow tax-deferred. But when it comes to making withdrawals, Roth IRAs can provide greater flexibility, but there may be tax and penalty considerations.

In a Roth IRA, the principal portion (the amount you put in) can be withdrawn tax-free and penalty-free at any time for any purpose. Withdrawals from the earnings portion of your Roth IRA are subject to income tax and a 10% penalty if made before the age of 59 1/2.

The early withdrawal penalty is waived if the funds are used for qualified education expenses, but you will still owe income taxes on the earnings portion of your withdrawal.

By contrast, withdrawals from your 529 plan are tax and penalty-free at any age, as long as the money is spent on qualified education expenses.

Income and contribution limits

An advantage of 529 plans is that individuals of all income levels can contribute to 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.

On the other hand, only individuals below certain Modified Adjusted Gross Income (MAGI) levels can contribute to a Roth IRA. For 2025, to contribute the maximum amount of $7,000 to a Roth IRA ($8,000 if over 50), MAGI must be less than:

• $150,000 for individual filers
• $236,000 for married couples filing jointly

Individuals with a MAGI of $165,000 or greater ($246,000 for couples) are ineligible for a Roth IRA.

Another advantage of 529 plans is that friends and family members can make contributions to a 529 plan, regardless of who owns it. Gifts to a 529 plan on birthdays, holidays and other milestones can add up over time. Third-party contributions to Roth IRAs from friends, family, and others aren’t allowed.

Effect on federal financial aid

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 Roth IRA may offer more flexibility, but the 529 plan allows you to contribute more and enjoy tax savings at any age. Some points to keep in mind:

• Do you want to save for goals other than education? Funds from 529 plans can only be withdrawn penalty-free if you use them to pay for qualified expenses related to education. While you can make unqualified withdrawals, you will have to pay income taxes and a 10% penalty on the earnings portion of your withdrawal.
• Are you able to contribute more than the annual Roth IRA contribution limit? There are no annual limits on 529 plan contributions and no gift tax implications if you stay within the annual gift tax exemption or use 5-year gift tax averaging. Aggregate contribution limits for many 529 plans exceed $500,000.
• Do you need Roth IRA funds for your own retirement?While Roth IRA withdrawals for qualified education expenses receive favorable tax treatment after age 59 1/2, you may be short-changing your own retirement when you use the funds to pay for your child’s college expenses.
• How will your choice impact financial aid eligibility? 529 plans will be counted as a parent asset on the FAFSA, which means up to 5.64% of the value will be considered. Withdrawals from a Roth IRA on the other hand are counted as either AGI or untaxed income. Income tends to have a bigger negative impact on financial aid eligibility than assets.

Is a Roth IRA better than a 529 plan?

A 529 savings plan is designed specifically for education savings, and offers several advantages over a Roth IRA, including no earned income cap, no annual contribution limits, and no penalties or taxes when withdrawals are spent on qualified education expenses.

Contributing to both a Roth IRA and a 529 savings plan allows you to save for retirement and your child’s college expenses, and provides you with maximum flexibility. The Roth IRA can serve as a backup if additional funding is needed, but shouldn’t be the primary savings vehicle if your goal is to save for college or other education expenses.

If you’re worried about having unspent funds in a 529 account, there’s good news. You can now do a federal tax-free rollover of funds from a 529 plan to a Roth IRA for the beneficiary within certain limits, subject to meeting specific criteria.