It’s always a good idea to dust off your education-savings strategy — especially if it’s been sitting untouched since your kids were still eating crayons.
The rules change, life changes and thanks to SECURE 2.0, the planning toolbox just got a little more interesting. Two accounts tend to steal the spotlight in this conversation: the 529 plan and the Roth IRA. They both get invited to the college-funding party, but they behave very differently once they arrive.
Let’s start with the classic: the 529 plan. This account was built specifically for education, and it sticks to its mission with impressive discipline.
Used properly, distributions for qualified education expenses are tax-free. That includes college, trade school, and — thanks to past rule changes — even certain K–12 expenses. It’s straightforward, purpose-driven and great for families who like clean lines and clear rules.
There is a tradeoff, which is money in a 529 is earmarked for education, and if you use it for something else, the IRS sends a not-so-friendly reminder in the form of income taxes and penalties on the gains. Translation: flexibility is not its love language.
Enter the Roth IRA — the financial equivalent of a Swiss Army knife. While it’s technically a retirement account, it’s surprisingly adaptable. Contributions (not earnings) can always be withdrawn tax- and penalty-free. Earnings can also come out tax-free for qualified education expenses, assuming the account meets certain age requirements.
And if your child earns scholarships, skips college or decides to become a YouTube star instead, the Roth doesn’t pout. The money can simply stay put and grow for retirement or even be used later for a first-time home purchase.
Another key difference shows up when it comes to financial aid. Roth IRAs don’t count as assets on the FAFSA, which can help keep your expected family contribution lower. Most other assets — including 529 plans — do get counted. That doesn’t make 529s “bad,” but it does mean the Roth quietly slips under the radar while the 529 stands in the spotlight.
Now for the SECURE 2.0 twist that made planners everywhere raise an eyebrow: unused 529 funds can now be rolled into a Roth IRA for the same beneficiary. Finally, a Plan B. This helps address the long-standing fear of overfunding a 529 and getting stuck with money you can’t easily repurpose. There are limits, of course — this is still the IRS — but the door is officially open.
So which account takes the win? That is a tricky question. There is no universal champion here, just smarter coordination. A 529 is fantastic for focused education savings. A Roth IRA shines when flexibility matters. Used together, they can cover education needs while leaving you options if life veers off the neat little path you planned at age three.
Bottom line: saving for education does not have to be an all-or-nothing decision. With the updated rules, you have got more wiggle room, more strategy, and fewer “what if” regrets. In financial planning, fewer regrets always takes a win.
Michelle Kuehner, a Chartered Financial Consultant and Master Certified Estate Planner, is the president of Personal Money Planning LLC, a Wichita Falls retirement planning and investment management firm.
This article originally appeared on Wichita Falls Times Record News: Avoid tax traps in college savings | Opinion
Reporting by Michelle Kuehner, Wichita Falls Times Record News / Wichita Falls Times Record News
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