Many taxpayers find themselves debating the merits of opening a Sec. 529 plan vs. a Roth IRA account. Find the pros and cons of each option below.

Historically the Sec. 529 plan has been the most popular way to save for college. There were an estimated 16.25 million accounts with assets exceeding $450.5 billion as of June 2023 (per the website educationdata.org). The cost of a traditional college education keeps going up and up, but today’s on-line education costs are just a fraction of the expense of a traditional college education. On-line classes may come to be the standard in the years to come. The Sec. 529 plans may not be suitable as the education savings mechanism of the future, as they lock up huge sums of money that can be applied penalty-free only to pay for the high costs of a traditional school.

With technology evolving at such a rapid rate, the Internet may be the solution to the high cost of college education, and huge sums may not be needed to pay for college expenses. Parents and grandparents, who are the ones that usually fund a child’s education, need to think about their retirement as well, since there are no grants, scholarships, loans or tax credits to help individuals with retirement well into their 80s.

One possible alternative is a Roth IRA where, like a Sec. 529 plan, the earnings accumulate tax-free and there is no penalty if the funds withdrawn are qualified distributions or a return of contributions. Funds not withdrawn for education can be used for retirement. Of course, to contribute to a Roth IRA, the account owner must have earned income, but AGI cannot exceed the top of the AGI-based threshold range for the year, and annual contributions are limited to the overall IRA contribution limitations.

The SECURE 2.0 Act addresses the issue of hesitation by families to start a 529 plan because of potentially having to pay tax and penalties if the funds are withdrawn for other than education expenses. This provision allows tax- and penalty-free rollovers from 529 accounts to Roth IRAs, for distributions after December 31, 2023, under certain conditions.