I Have a Sizable Roth IRA. Do I Still Need a 529 for My Grandkids' College?

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Wealth Wise is Kiplinger's advice column on navigating retirement-related dilemmas. Got a question? See below for how to send it to us.

Dear Wealth Wise: If I have a fully funded Roth account, is there any advantage to adding a college 529 plan for my grandkids' college? I believe paying for college from a Roth account is just as good or better than paying for college from a 529 plan. A 529 plan is essentially the same as a Roth, but with different rules for how the tax-free money can be used. Is this correct? — Confused Grandparent

Dear Confused: The average cost of college today is $38,270 per year, including books, supplies and living expenses, according to the Education Data Initiative. If you're retired and are in a position to help your grandchildren cover the cost of college, it's natural to want to pitch in. But it's important to do so as efficiently as possible.

Here, a grandparent with a robust Roth IRA wants to know if there's any point to funding a 529 plan for their grandkids. As they correctly point out, 529 plans and Roth IRAs have similarities. Both accounts are funded with after-tax dollars, but gains and withdrawals are tax-free provided plan rules are followed.

In the case of a Roth IRA, gains and withdrawals are fully tax-free, provided you're at least 59½ and your account meets the five-year rule. For a 529 plan, gains and withdrawals are tax-free provided your money is being used to pay for qualified education expenses.

But that doesn't mean you should just flip a coin to choose the right home for your grandkids' college savings. It's important to understand the nuances of funding an education through a Roth IRA versus a 529 plan.

"For affluent families, I don't view a Roth IRA and a 529 plan as interchangeable tools." — Julian B. Morris

Roth IRAs and 529s are different beasts

While you can technically choose either a Roth IRA or 529 plan to save for a grandchild's college, Julian B. Morris, founder and principal at Concierge Wealth Management, says, "For affluent families, I don't view a Roth IRA and a 529 plan as interchangeable tools."

Morris calls a Roth IRA "one of the most valuable pieces of financial real estate that a high-income family can own." He points out that Roth assets are usually tricky for higher earners to accumulate. That's why he generally views Roth assets as retirement assets first and education assets last.

"Every dollar withdrawn from a Roth IRA for college is a dollar that loses the opportunity for decades of future tax-free compounding for retirement," he explains.