First some background:
I'm a new parent and I live in Nevada, a state with no state income tax. I'm 26 and my wife is 29. She's finishing her PhD (to hopefully become a professor) and I'm an engineer. We're homeowners. I'm a strong earner but I expect our household income to increase nearly 70% within 3 years when she starts working. My current income is about $95,000.
I have set up a 529 for my child's college fund but the more I look at it the less useful it seems compared to alternatives. The 529 is quite restricted -- What if she doesn't go to college? What if she gets a full scholarship? What tuition benefits will my wife get as a professor?
I will keep the fund if people want to give her gifts, but I think I have a better alternative.
My wife and I fully fund both our Roth IRAs. My employer also offers a 401k plan, and I contribute up to their match, which ends up about $6500 401K contribution annually and $10k to the IRAs (increasing annually).
However, it seems to me like the major value in the Roth 401K offering is that it can be rolled into a Roth IRA when I change jobs. Children's education expenses are not qualified distributions from 401K but they are from a Roth IRA if you've passed the 5-year threshold (and you take only contribution, not earnings)
I'm planning on saving more into my Roth 401K under the assumption that I'm not going to be at this job in 18 years. As such, I will be able to roll the entire Roth 401K into my Roth IRA.
In this way, I can transfer the funds, without penalty, into my personally directed account which has much fewer restrictions on distributions.
EDIT: There seems to be some confusion about my strategy here. I hope this clarifies.
We currently max out the contributions in both Roth IRAs, we will continue doing this. This amounted to $10,000 in 2012 and will be $11,000 for 2013
We currently contribute to the Roth 401K up to my employer's match, we will continue doing this. This amounts to $7500 for 2013.
The contribution limit for a 401K in 2013 is $17,500... so we can contribute roughly $10,000 more in 2013.
This, separately from mortgages etc our retirement contributions for 2013 will be $18,500, leaving $10,000 additional capacity in the 401K.
In addition, we want to start contribution to a college fund. Instead of contributing to the 529, we would contribute more to the Roth 401k. Eventually we can roll the Roth 401K into the Roth IRA. So let's say I want to save $6000 for my daughter's college this year... I think it's advantageous for me to invest it into the Roth 401K rather than the 529