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

Edit (2023) I'm commenting on my own question eight years later to point out that now, with the passage of SECURE, there are additional pathways to convert 529's into Roth IRAs which change the dynamics of those question and answer.

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    Regarding the full scholarship issue: You can take money out of the account equal to the scholarship without penalty, though you will still owe taxes. Or you can transfer the money to a sibling or other family member. The money can be used for room and board, which might not included in scholarships. Feb 24, 2013 at 18:29
  • @mhoran_psprep I understand this, but it still seems that the Roth IRA is a better account for the purpose.
    – Matthew
    Feb 25, 2013 at 16:36
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    Well, then I worry if you will have enough for both. I cannot do the math for you (perhaps at all), but when you retire you will need a pretty big pile of money. If you subtract the very large cost of college from that pile, will you have enough? The contribution limits might make it more difficult. I am not answering because I don't know, but that is my first fear.
    – MrChrister
    Feb 25, 2013 at 18:44
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    @MrChrister few people even max out their IRAs; we do. Few people contribute significantly to a 401K; we do. Whether I put college savings into a 529 or some other vehicle doesn't have anything to do with "having enough"... Are you suggesting that this isn't sufficient savings?
    – Matthew
    Feb 25, 2013 at 18:46
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    Good and interesting question. One other perspective - it sounds like you are concerned about the limitations imposed by the 529. If so, you could consider simply saving in a taxable account (which of course has no limits and no restrictions), and calculate how much you might lose in this scenario when the time comes to pay capital gains. Then you could determine whether the additional taxes are worth (to you) the freedom of having no restrictions on the money.
    – Jeremy
    Apr 20, 2013 at 17:13

1 Answer 1


Yes, your plan makes sense for the reasons you cite. The 529 has limited investment choices, along with fees that are often higher than an exact ETF equivalent. A .5% annual expense, even just .4% higher than the ETF, still will cost you an average 4% over the 2 decades of savings.

You currently seems to be saving enough, but once your wife's income starts rising, I might have some concerns. The current dollar limit on the 401(k) may not be as high a percent as you'd like. But, for now, it looks fine.

You should also note that at higher incomes, you might not be permitted to deposit to a Roth IRA, and might have to go the 'back door' route, depositing to a traditional IRA and converting to Roth each year.

Also - you seem focused on Roth. I'd suggest that leaning toward Roth is fine, 100% Roth, not so much. Consider, a retired couple today has $12,200 standard deduction, and a combined $7800 in exemptions, for a very round $20,000 in income that has zero tax in retirement. Even a couple in the 15% bracket benefits by some pretax savings that's withdrawn at zero. In your case, I don't know the rest of your details, just offering something now that you might be missing. $500K pretax funds to generate the $20K/yr withdrawal. Less than that, and you've missed an opportunity.

  • This is an old answer, but I would just note that many states offer a state income tax deduction for 529 deposits that more than offset all of the disadvantages you mention.
    – D Stanley
    Jan 12, 2023 at 14:48
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    Yes, and tax code has changed as well, so much of my answer is now outdated. Hmmm. Mar 21, 2023 at 21:12

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