The new 529-to-Roth rollover provision (SECURE 2.0, effective 2024) significantly changed the 529 vs Roth IRA debate for college savings. Here's the updated analysis.
The core trade-off
| 529 Plan | Roth IRA for college | |
|---|---|---|
| State tax deduction | Yes (in most states) | No |
| Growth tax treatment | Tax-free (for education) | Tax-free |
| Annual contribution limit | Very high (gift tax limits) | $7,000/year |
| If child doesn't go to college | 529→Roth rollover (up to $35k) | Keep for retirement |
| Financial aid impact | Counted as parental asset (5.64%) | Not counted for aid |
| Qualified expenses | Education expenses | Anything (withdrawals flexible) |
The new 529-to-Roth rollover (game changer)
The biggest objection to 529 plans — "what if my kid doesn't go to college?" — is now largely resolved. Up to $35,000 of unused 529 funds can roll to the beneficiary's Roth IRA (limited to annual Roth contribution limit, over multiple years, 529 must be 15+ years old). This makes 529 plans a "heads I win, tails I don't lose too badly" proposition.
The optimal strategy
For most families: open both. Max the Roth IRA first (retirement priority, plus can be used for education). Then contribute to 529 for the state tax deduction and higher contribution room. The Roth IRA is the better primary vehicle for smaller amounts due to flexibility; the 529 scales better for larger college savings goals.
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