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

The direct after-tax contributions can be withdrawn tax-free at any time, but any earnings may generate tax liability (although the 10 percent penalty is waived if the funds are used to pay qualified education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 2024, 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 $18,000 in 2024, or $36,000 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 $90,000 in 2024).