I am considering starting an account to help fund my girlfriend's niece's education. I am looking at contributing a small amount each month. I would also like to maintain control of the money and be able to withdraw it (for my own use) in case of emergency, or in case she doesn't need the money or decides not to go to college.

The purpose of this question is to compare using a 529 vs a Roth IRA as this savings vehicle, although I am open to other vehicles as well. Note that the Roth would NOT be considered retirement savings, I have a 401k as well.

One advantage of not using a 529 is that if the niece goes to a private high school, I couldn't use 529 money for it, but I could use Roth money.

One advantage of a 529 is that I can use all of it (including earnings) for qualified expenses tax-free, but if I wanted to withdraw earnings from the Roth I would have to pay a penalty (right)?

Assuming two endgames:

1) Niece goes to college and uses all the money 2) Niece doesn't go to college, or I need the money myself

What are the advantages and disadvantages of a 529 vs a Roth vs (any other option that I may not be considering)? And which one might you recommend?


  • another option is a Coverdell Commented May 9, 2012 at 16:03

3 Answers 3


A 529 plan is set up in a specific beneficiary's name but the money can be rolled over or transferred into another 529 plan in the same beneficiary's name, or the beneficiary can be changed by the owner of the account. I mistakenly believed that the new beneficiary could be anyone else, but as mhoran_psprep has pointed out in the comment below, the new beneficiary must be related to the previous one in specific ways as detailed in Publication 970 2011, Tax Benefits for Education in order for the change to occur without any tax consequences. So my original statement that distributions can be used for anyone's educational expense without tax consequences was incorrect; if the new beneficiary is not related to the original beneficiary, tax consequences will indeed occur. Note also that unlike IRAs where the entire amount can be withdrawn by the owner without incurring a 10% penalty after a certain period or after reaching a certain age, distributions from a 529 plan for nonqualified expenses (including as a special case a withdrawal of funds by the owner) will incur the 10% penalty tax regardless of when this occurs.

The problem with UGMA accounts is that you have to turn the money over to the beneficiary when that beneficiary becomes an adult (18 years old in most cases) regardless of your current opinion of that beneficiary, and the beneficiary is free to use the money to buy a motorcycle with it if she chooses instead of using it for her education. In this sense, I agree with mhoran_psprep's answer that it is best to put away the money in an ordinary account without seeking tax benefits, and deal with the matter as you see fit when the niece is filling out her college paperwork.

  • Is it possible to withdraw the 529 money once you reach a certain age? It will be taxed at that time of course.
    – MrChrister
    Commented May 10, 2012 at 21:21
  • @MrChrister The money that one puts in is post-tax money (for Federal tax purposes). The earnings grow tax-free. As long as the money in the 529 plan account is used for the educational fees etc (qualified purposes), there is no problem. If money is withdrawn (generally possible at any age) for non-qualified purposes, the earnings are taxed as regular income (no breaks for qualified dividends, capital gains, etc) and a 10% penalty is also imposed. The money originally deposited (or added later) by the owner is all post-tax money and comes out tax-free and without any penalty. Commented May 10, 2012 at 21:56
  • The IRS does require that a beneficiary be named when the account is set up, and does limit who the can be transferred to without it being a taxable event Publication 970 2011, Tax Benefits for Education irs.gov/publications/p970/… . Commented May 11, 2012 at 12:15
  • Could you please expand on why putting the money in a savings account is a better idea compared to a tax-advantaged account like a 529 or IRA? It sounds like the main reason is that the tax advantages aren't worth the constraints they impose on how the money can be used?
    – Jeremy
    Commented May 13, 2012 at 17:37
  • 1
    The tax deferral or elimination advantages for IRAs and 529 plans are good, but if taxes have to be paid, earnings are taxed as regular income. Say you invest in a growth fund which distributes lots of capital gains and you are in the 28% tax bracket. You pay taxes at 20% on the growth in the taxable fund each year vs 28%+10% penalty in the 529/IRA fund upon withdrawal. My personal preference is to not use a 529 plan at all. Since I am older that 59.5 years, an IRA might work for me (no penalty for withdrawal) to put money away for education (of my grandchildren). Will it work for you? Commented May 13, 2012 at 18:13

The biggest issue is determining how committed you are to this "niece". When setting up an account (529/prepaid tuition/Universal Gift to Minors/Coverdell/Roth) you are making a commitment that locks you into some provisions. They all have different amounts of control, and can impact taxes and financial aid.

The states involved can even be important. Some will give tax breaks. How they handle state vs private schools and out of state schools will also differ.

The problem is that it is hard enough knowing what a kid 10-18 years from now is going to want to do, or be able to do. The government has crafted some provisions to handle these complex issues: scholarships, going to a service academy, going to a private school, death of the child...what I don't think they have covered is ending the relationship.

The best option is to set aside the money in a regular account, with no special tax provisions; and then when they are close to graduating determine the best way to handle the transfer. Yes you may have given up some tax benefits, but it will still be your money.

You will have to determine how this money will be transferred, but that will depend on the tax rules, and financial aid policies in the future. Options include gift to niece, direct payment, graduation gift...

  • There are significant downsides to "The best option is to set aside the money in a regular account, with no special tax provisions;". Roth earnings are tax free, you are leaving a HUGE (e.g., 25% compounded) advantage on the table.
    – Tommy
    Commented Jun 8, 2017 at 17:06

I know it isn't exactly the question you asked, but please consider your future too.

529 is the correct answer, because if you can fund a Roth, you should be funding it for your own retirement.

Your retirement has much a higher priority over anybody's college fund. It is pretty great that you want to set aside cash for the niece's education, I think asking which vehicle is best for saving for education might be the wrong question.

Students have many options for going to school and paying for it but retirement is pretty limited.

http://www.clarkhoward.com/news/clark-howard/education/clarks-529-guide/nFZS/ is a good place to learn about 529s and makes good suggestions on where to get one. Do it yourself, and don't pay a broker or agent to do it for you.

If your retirement is already handled, feel free to vote me down and I will delete this.

  • Thanks for your concern. My retirement is already handled, I have a 401k which I am already funding at 15%. I know I could put every penny towards retirement but I want to help this kid out too. Thank you for the link regarding the 529s, I'll check it out!
    – Jeremy
    Commented May 10, 2012 at 16:41

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