A financial adviser has recommended to me using my IRA to save for my son's college with the following notion in mind:

  1. 529 plans must be used for education, therefore if he doesn't want to attend* or if by some miracle there's more in the account than he uses, it would be forfeit without heavy penalties.

  2. I do not currently max the contribution to my IRA; I can increase my monthly amount put in the mutual fund.

What are the pros and cons of this thinking? In my mind one problem is that the funds are not segmented and I'd rather think of retirement separately from education. Are there any special advantages to the 529 that I miss out on by using the IRA?

*and break his father's heart though at age one no need to put pressure on him


2 Answers 2


Tax-wise, a 529 is similar to the Roth IRA. Deposits are not pre-tax for federal purpose, and if withdrawn according to the rules, the growth can be tax-free.

For most people, the IRA is likely needed to function as intended, for retirement, but if, as in your case, there's little downside to using the extra IRA space to save for college. One benefit is cost. The typical 529 has a layer of fee above what you'd pay for similar investments in the IRA. For example, the S&P index in my 529 costs 0.4%, compared to 0.1% that you might get in a typical S&P ETF. The IRA, on the other hand has few restrictions, you can invest in any stock, fund, or ETF you choose. The 529 has its own small offering.

(Edit - then why do I have a 529? Years ago, I signed up for a credit card that rebated 2% of every purchase to a 529 account. And there's no chance that my daughter will not go to college. So, having the card issuer pay for nearly a full semester seemed cool)

  • Is the 2% of every purchase to 529 account still available? That sounds like something I might be interested in.
    – Eric
    Commented Aug 26, 2012 at 22:15
  • fidelity.com/cash-management/american-express-cards is the ad page. It's now good for plain cash back to a brokerage acct, but when I signed up, it was a Mastercard/529 and that's what I stuck with. Commented Aug 26, 2012 at 23:34

There are protections built into the 529 to minimize some risks you mentioned:

  • Offset for scholarships (including the service academies)
  • It can be transfered to a limited number of relatives.
  • Can be used for tuition, room and board, books, supplies a computer.
  • Not limited to just 4 year colleges

Some states do allow you to write off the deposits from state taxes.

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