College Savings Savvy: 529s Versus Roth IRAs

In-state or out-of-state school? Public or private? Small or large? Long before families grapple with such college-related decisions, parents — and often grandparents — confront an important choice that could largely determine these later ones: how to save for college. And the earlier you decide the how, the better, because ABCs turn into SATs faster than you think.

Two college savings options

While there are various ways to invest specifically for college expenses, some families have begun to wonder whether Roth IRA retirement plans can do double-duty as college savings vehicles. Below, I compare Roth IRAs with 529 plans — a popular option for college savings — to help answer that question.

Both 529 college savings plans and Roth IRAs are tax-advantaged investment vehicles. However, 529s are intended specifically for college expenses, while IRAs were specifically created to help individuals with saving for retirement. (Check out my previous blog for background on 529 plans: It’s 529 College Savings Plan Day!) Here’s a quick look at how the two options differ in terms of structure:


529 college savings plan

Roth IRA

Income limits

There are no income limits.

Couples must have an income of less than $184,000 ($117,000 for individuals) to make the maximum contribution.

Contribution limits

There are generally no annual contribution limits.

Lifetime contribution limits, which vary by state, range from $235,000 to more than $400,000. For example, Rhode Island’s plan has a lifetime limit of $395,000 per beneficiary.

Contributions up to $14,000 ($28,000 for married couples) qualify for the annual gift tax exclusion.

The maximum contribution for 2016 is $5,500 ($6,500 for those over 50).


Withdrawals are tax free if used for qualified education expenses.

The earnings portion must be spent on qualified higher education expenses — tuition, books, fees, room and board — at an accredited school.

A new beneficiary — another child, a relative or even yourself — can be assigned to an account that has money left over, and the balance used to pay for qualified higher education expenses.

The principal can be withdrawn tax free without penalty any time for any purpose.

Earnings can be withdrawn tax free without penalty at age 59½. Qualified higher education expenses are exempt from the early withdrawal penalties, provided the Roth IRA has been open for at least five years.

Effect on federal financial aid

A 529 owned by a custodial parent or dependent student is considered a “parental asset”; only 5.64% of parental assets are included when the estimated family contribution (EFC) is determined. A lower EFC can result in increased financial aid.

Distributions from parent- or student-owned 529 accounts aren’t reported on federal income tax returns, nor are they added as income on the following year’s Free Application for Federal Student Aid (FAFSA). (Note that distributions from accounts owned by grandparents or other relatives are reported.)

Because retirement accounts aren’t considered assets on the FAFSA, a Roth IRA doesn’t have an impact on financial aid eligibility.

Roth IRA funds used to pay for college are considered student income on the following year’s FAFSA, which can reduce eligibility for aid significantly — up to 50% of income.

Tax deductions

Many, but not all, states offer state tax credits or deductions on their home-state 529 plans.

Roth IRA contributions aren’t tax deductible at either federal or state levels.

The better choice?

I wish I could tell you there is clear winner in this comparison, but the fact is there are benefits to both.

As noted in the table above, 529s have far higher contribution limits, offer tax advantages and allow the account owner to maintain control. In addition, 529s generally include investment options that are specifically structured to take into account the shorter time frame for investing — college savers typically have 18 or fewer years before the assets are needed, while retirement savers can have 20 or 30 years or more to invest.

And retirement savers can choose to delay retirement or adopt a more frugal lifestyle if their retirement account doesn’t achieve their goal at a given retirement date; college savers have no control over college costs, and very few options regarding when the expenses will hit. A 529 can help you work within those parameters.

A Roth IRA has benefits as well, including no limits on what distributions can be used for. And different circumstances might make one vehicle better than the other at a given point in time. For example, it may make sense to use a parent-owned 529 account for the first three years of college, and IRA distributions for the final year, when they won’t affect financial aid.

All that said, I do have an opinion. I’m a practical guy, so it makes sense to me to use tools in the way they were intended: 529 plans for college savings and Roth IRAs for retirement savings. I’m also a retirement guy, and that makes me reluctant to tap retirement savings, such as Roth IRAs, for other purposes. I would caution parents and grandparents against using retirement savings to pay for college unless they’re certain their retirement plan can take the hit without a negative long-term effect.

In the end, as with all financial decisions, the best choice for you depends on your situation. That’s why it’s important to work with your financial advisor to determine the best college savings strategy for your family as part of your overall financial plan.

Next steps

Start by contacting your financial advisor. If you don’t have an advisor, other resources are available from the IRS:

  • A brochure on college savings plans that describes qualified withdrawals in detail, defines what constitutes eligible educational institutions, and offers other important information. (If you want to learn more about Invesco’s new college savings plan, visit


Important information

Earnings on nonqualified withdrawals may be subject to federal income tax and a 10% federal tax penalty, as well as state and local income taxes. Tax and other benefits are contingent on meeting other requirements, and certain withdrawals are subject to federal, state and local taxes.

Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other benefits that are only available for investments in that state’s qualified tuition program.

For more information about CollegeBound 529, contact your financial advisor, call 877-615-4116, or visit to obtain a Program Description, which includes investment objectives, risks, charges, expenses and other important information; read and consider it carefully before investing. Invesco Distributors, Inc. is the distributor of CollegeBound 529.

An investment in the portfolios is subject to risks including: investment risks of the portfolios, which are described in the program description; the risk (a) of losing money over short or even long periods; (b) of changes to CollegeBound 529, including changes in fees; © of federal or state tax law changes; and (d) that contributions to CollegeBound 529 may adversely affect the eligibility of the beneficiary or the account owner for financial aid or other benefits. For a detailed description of the risks associated with CollegeBound 529 and the risks associated with the portfolios and the underlying funds, please refer to the program description.

CollegeBound 529 is administered by the Rhode Island Office of the General Treasurer and the Rhode Island State Investment Commission. Ascensus College Savings Recordkeeping Services, LLC, the program manager, and its affiliates, have overall responsibility for the day-to-day operations of CollegeBound 529 including recordkeeping and administrative services. Invesco Advisors, Inc. serves as the investment manager. Invesco Distributors, Inc. markets and distributes CollegeBound 529.

CollegeBound 529 portfolios invest in exchange-traded funds, mutual funds and separate accounts. Units of the portfolios are municipal securities, and the value of the units will vary with market conditions. Investments are not guaranteed or insured by the State of Rhode Island, the Rhode Island Office of the General Treasurer or the Rhode Island State Investment Commission.

Read more expert views on college savings plans.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

All data provided by Invesco unless otherwise noted.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds. Invesco Advisers, Inc. and other affiliated investment advisers mentioned provide investment advisory services and do not sell securities. Invesco Unit Investment Trusts are distributed by the sponsor, Invesco Capital Markets, Inc., and broker-dealers, including Invesco Distributors, Inc. PowerShares® is a registered trademark of Invesco PowerShares Capital Management LLC (Invesco PowerShares). Each entity is an indirect, wholly owned subsidiary of Invesco Ltd.

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