I get the question every month from someone planning for their kids. Should I open a 529 or save in a Roth IRA. Both work. Both have advantages. The right answer depends on how sure you are your kid is going to college and how much flexibility you want with the money if life changes.
The 529 is a state sponsored education savings account. Money goes in after tax. Investments grow tax free. Withdrawals for qualified education expenses come out tax free. Qualified expenses include tuition, room and board, books, and required fees at any accredited college, plus up to ten thousand a year for K-12 tuition under the 2017 tax law. Tennessee does not have a state income tax so we do not get a state deduction for contributions, but the federal tax free growth and withdrawal still apply.
The Roth IRA is a retirement account. Money goes in after tax. Investments grow tax free. Withdrawals after age fifty-nine and a half are tax free for any reason. The contribution limit for 2026 is seven thousand dollars a year for anyone with earned income, eight thousand if you are fifty or older. There is an income cap. Single filers above one hundred sixty-one thousand and married filing jointly above two hundred forty thousand cannot contribute directly. The backdoor Roth strategy works around the cap.
The 529 wins on contribution limits. You can put fifty-three thousand dollars in a 529 in a single year using the five year forward gift election, with no penalty. A married couple can put one hundred six thousand into a 529 in one year for one child. The Roth caps at seven or eight thousand per year. If you have grandparents or a high earning parent who wants to dump money in fast, the 529 is the only account that absorbs it.
The Roth wins on flexibility. If your kid does not go to college, gets a full scholarship, or you change your mind about funding their school, the Roth money is yours for retirement. No taxes, no penalties, no questions. The 529 has more rules. Non qualified withdrawals trigger income tax plus a ten percent penalty on the earnings. The principal comes out tax free always, but the growth gets taxed and penalized if you do not use it for school.
The 2024 SECURE 2.0 changes shifted the math. Starting in 2024 you can roll up to thirty-five thousand dollars from a 529 into a Roth IRA in the beneficiary's name, lifetime cap. The 529 has to be open fifteen years. Annual rollover amounts cannot exceed the Roth contribution limit, currently seven thousand. So a parent who over-saves in a 529 can move thirty-five thousand into the kid's Roth IRA over five years. This made 529s more flexible than they were before, but the cap is real and the limits matter.
How to think about the choice. If you are sure your kid will go to college and you have high contribution rates, max the 529. The growth is uncapped, the contribution limits are large, and the qualified withdrawal is tax free. If you are unsure, lower income, or already maxing out other tax advantaged accounts, use the Roth. The flexibility is worth more than the slight tax difference. If you can fund both, fund the Roth first up to the contribution limit and then put additional savings into the 529.
How financial aid treats each. The 529 owned by a parent counts as a parental asset on the FAFSA, which reduces aid by 5.64 percent of the account value. A Roth IRA does not count as an asset on the FAFSA at all. Withdrawals from the Roth in the year before financial aid applications can count as income, which is treated worse than assets. So Roth withdrawals for college can hurt aid more than 529 withdrawals. The math gets specific. If you are pursuing significant need based aid, talk to a fee only financial planner before you decide.
What I would do for a one year old today. Open a 529 with five thousand dollars and contribute three hundred a month. By age eighteen at seven percent average return, the account is worth about one hundred thirty thousand dollars. That covers four years of in-state public tuition or two years of private. If college never happens, roll up to thirty-five thousand into the kid's Roth at age twenty, leave the rest in the 529 for grandkids or graduate school, or take the penalty hit on the unused growth.
Tennessee specific notes. We do not have a state tax deduction for 529 contributions because we do not have a state income tax. That removes one of the bigger reasons families in other states pick a 529. Vanderbilt and other Tennessee schools accept any 529 plan, not just Tennessee's TNStars program, though TNStars has reasonable fees and good index fund options. Vanguard, Fidelity, and Utah's my529 are also strong options for Tennesseans. Look for plans with expense ratios under 0.20 percent and broad index fund choices.
Whichever you pick, automate the contributions. Three hundred a month for eighteen years at seven percent is one hundred thirty thousand dollars. Five hundred a month is two hundred sixteen thousand. The number compounds. The hard part is starting and not stopping.
