Putting away money for your child’s education is a no-brainer in the era of five-figure student debt, but it can be a little tricky figuring out the best ways to save. While 529 plans are a go-to option for many families, Roth IRAs are emerging as a popular alternative investment vehicle to save for college.
Both accounts come with tax advantages and could grow your money, so which one is right for you? (Although investing is one of the best ways to increase your savings, be mindful of market volatility. You can lose as much as you gain.)
Named for a section of the U.S. tax code, 529 plans are designed specifically to save for college. The most popular plans function much like a 401k retirement account because the money you put in is invested in stocks, bonds or money market funds. Earnings on the plans are not subjected to federal taxes so long as you use the money for “qualified education” expenses — tuition, books, fees, room and board — at any accredited school. Grandparents, aunts, uncles and anyone else can contribute to these accounts. The plans can transfer to other members of a family, but the money must be used for education or withdrawals will come with tax consequences.