When your clients select a vehicle for college savings, they typically gravitate toward the Sec. 529 plan. And with good reason: It’s called a “college savings plan,” after all, and if offers some remarkable benefits. But before they make a decision, it’s a good idea to explore some of the alternatives, especially the Roth IRA.

Both Sec. 529 plans and Roth IRAs are funded with nondeductible contributions and both allow clients to take qualified distributions of contributions and earnings tax-free. (Some Sec. 529 plans also offer state tax benefits.) When it comes to college savings, the biggest advantages of Sec. 529 plans are their generous contribution limits and their ability to accept contributions from grandparents and other family and friends. Limits vary from plan to plan and from state to state, but many permit total contributions of $400,000 or more. Annual contributions to a Roth IRA, which can only be made by the account owner, are currently limited to $6,000 per year ($7,000 if the owner is 50 or older). So, for example, a 30-year-old couple with a newborn who contribute $12,000 ($6,000 each) per year to Roth IRAs will have contributed only $216,000 by the time the child reaches age 18 ($6,000 x 2 x 18).

Despite their lower contribution limits, however, Roth IRAs enjoy some significant advantages. Distributions from Sec. 529 plans are tax-free only if the client uses them for “qualified higher education expenses,” including tuition and fees, room and board, books, and computers. (These plans can also be used for certain elementary and secondary school expenses.) If the client uses the funds for nonqualified purposes, the earnings portion of the distribution will be subject to taxes plus a 10% penalty. With a Roth IRA, on the other hand, one can generally withdraw contributions tax-free any time and for any purpose. That means the funds can be used for expenses that would not qualify for tax-free treatment if distributed from a Sec. 529 plan. Examples include cars or other transportation expenses, and off-campus housing expenses in excess of the college’s room and board allowance. Plus, once a client reaches age 59½ (and the account is at least five years old), he or she can withdraw earnings tax-free as well and use them for any purpose.

Another advantage of the Roth IRA is that any funds that aren’t used for education expenses continue to grow indefinitely, providing the client with additional tax-free retirement savings. Sec. 529 funds that aren’t used for qualified education expenses (either for the original beneficiary or a new beneficiary) will eventually be subject to taxes and penalties.