529 vs. Roth IRA

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

529 Plan vs. Roth IRA

Key Differences

  1. Purpose:
    • 529 Plan: Specifically for education expenses.
    • Roth IRA: Primarily for retirement savings, but can be used for education.
  2. Tax Benefits:
    • 529 Plan: Contributions are not federally tax-deductible, but earnings and withdrawals are tax-free if used for qualified education expenses.
    • Roth IRA: Contributions are made with after-tax dollars, and both earnings and withdrawals are tax-free after age 59½.
  3. Contribution Limits:
    • 529 Plan: Varies by state, generally high.
    • Roth IRA: Limited to $6,500 per year (as of 2023) or $7,500 if over 50. In 2024 they will go up for $7,000 and $8,000 if over 50.
  4. Investment Options:
    • 529 Plan: Often limited to a selection of mutual funds.
    • Roth IRA: Wide range of investment choices, including stocks, bonds, mutual funds.
  5. Age Restrictions:
    • 529 Plan: No age restrictions.
    • Roth IRA: Contributions can be made at any age, but withdrawals are penalty-free only after 59½, with some exceptions.
  6. Eligibility:
    • 529 Plan: Open to anyone.
    • Roth IRA: Income restrictions apply.
  7. Withdrawal Penalties:
    • 529 Plan: Non-qualified withdrawals are subject to income tax and a 10% penalty on earnings.
    • Roth IRA: Early withdrawal of earnings may incur taxes and penalties, though contributions can be withdrawn tax-free.
529 Vs. Roth Ira

Use Cases

  1. For Education:
    • 529 Plan: Ideal for saving for college or K-12 tuition.
    • Roth IRA: Can be used for education, but less optimal due to retirement focus.
  2. For Retirement:
    • 529 Plan: Not suitable.
    • Roth IRA: Best choice for long-term retirement savings.
What Is A Roth Plan

Comparison of Features

Feature529 PlanRoth IRA
PurposeEducationRetirement (Flexible)
Tax BenefitTax-free earnings for educationTax-free earnings & withdrawals after 59½
Contribution LimitsHigh (Varies)$7,000 ($8,000 if >50) in 2024
Investment OptionsLimitedWide Range
Age RestrictionsNoneWithdrawals after 59½
EligibilityOpen to AllIncome Limits Apply
Withdrawal Penalties10% on non-qualified earningsPenalties on early earnings withdrawal
Roth Ira Vs 529

Conclusion

Choosing between a 529 Plan and a Roth IRA depends on your primary goal – education savings or retirement. While both offer tax advantages, they serve different purposes and have unique features and restrictions. Understanding these differences is crucial to making an informed decision.

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Frequently Asked Questions

What is the 5-year rule for a Roth IRA?

According to the Roth IRA five-year rule, you are not eligible to withdraw your earnings without tax until you have had a Roth IRA account for at least five years since your initial contribution.

What happens to a 529 plan when my child turns 21?

When your child becomes of legal age, they can take control of the account, and the 529 plan’s funds won’t expire. Even if they don’t attend college, they can use the funds. The investments will grow without tax deductions and can be used for the education expenses of other family members or grandchildren.

What happens to a 529 plan if it is not used?

You can contribute to a 529 plan during and after college, as there are no time limits. If there are any remaining funds, you can use them tax-free to pay off student loans.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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