3713.01 / What do clients need to understand about using Roth IRAs for college savings?

Roth IRAs are funded with after-tax dollars to generate tax-free income later in life, usually during retirement. The funds can be withdrawn tax-free once the taxpayer reaches age 59 ½.

The direct after-tax contributions can be withdrawn tax-free at any time, but any earnings may generate tax liability (although the 10 percent penalty is waived if the funds are used to pay qualified education expenses).

IRC Section 529 education savings plans are also funded with after-tax dollars that are permitted to grow on a tax-free basis. Section 529 plan distributions are not taxed when received if the funds are used to pay for qualified higher education expenses (a 10 percent penalty on the earnings portion may apply if the funds are not used for qualified expenses).

Each savings plan has annual contribution limits. In 2025, the maximum that a client can contribute to a Roth IRA is $7,000 ($8,000 if the client is at least 50 years old). The contribution limit for 529 plans is based on the annual gift tax exclusion amount (clients can contribute up to $19,000 in 2025, or $38,000 for married couples). Clients also have the option of contributing five years’ worth of contributions to the Section 529 plan in a single year (up to $95,000 in 2025).

Unlike Roth accounts, 529 plans are regulated at the state level. Options for funding these plans can vary significantly depending upon the state rules governing the plan. For example, the rules governing contribution deadlines vary by state. State laws also limit the amount that can be accumulated within the 529 plan over a lifetime (the aggregate limit varies from state to state and can be somewhere between $235,000 and $529,000).

Many clients may question why they would use a Roth IRA, which is primarily geared toward retirement savings, to fund their child’s education expenses. In the past, the primary pro-Roth argument was that it is always possible that a child will not attend college (or will receive a scholarship) so that the 529 plan funds will not be needed. Under the SECURE Act 2.0, taxpayers will be permitted to roll up to $35,000 in Section 529 plan dollars into a Roth IRA beginning in 2024.

Taxpayers who earn more than $246,000 (married couples) or $165,000 (individuals) in 2025 cannot contribute directly to a Roth IRA. These taxpayers can execute Roth conversions to fund the account, but those conversions generate current tax liability.

For clients who are eligible to contribute directly to a Roth based on the annual income limits, the Roth may be more attractive than the Section 529 plan. Roth contributions are not counted against the annual or lifetime gift tax exclusion or exemption—while 529 contributions are treated as gifts that count toward these limits.

Other clients might be more attracted to the Roth option if they have already maxed out their annual 529 contributions based upon state limits and want to save more to cover future education costs. The Roth option can also be useful for clients who might want to use the funds for retirement expenses should the child not need the funds for educational expenses—for example, because the child has received a scholarship or an attractive financial aid package.

Despite this, clients should remember that earnings on Roth contributions are taxable if they are withdrawn within five years of opening the account. Further, if the client has no earned income for the year, the Roth contribution option is not available, but the 529 plan may still be a viable savings solution.

Many states also offer a state income tax deduction or credit for contributions to Section 529 savings plans—while no states offer a similar deduction for Roth contributions.

The impact of using the Roth or 529 plan funds upon the student’s financial aid eligibility must also be evaluated. Roth accounts generally are not reported as assets for FAFSA purposes, while 529 plans can impact the child’s eligibility for need-based financial aid. On the other hand, the Roth distributions themselves are counted as income for FAFSA purposes.