529 vs. Custodial Roth

[atarianna]

I am trying to figure out which option makes more sense for our family.

We’ve been saving in the kids’ 529s since each of them were born. We don’t intend to cover their entire education and want some flexibility for how the savings can be used.

We have approximately $30k set aside for each child (all around age 10) in 529s which I know can be converted penalty free to a Roth if otherwise not used for education. We are considering pausing 529 contributions and opening custodial Roth’s instead; which seem more versatile (using $10k for the purchase of a home, can be used for education, contributions can be withdrawn penalty free) but want to ensure it’s a good decision.

What I know: $7k/year contribution limit; kids earnings must be at least 50% of total contributions to the account, custody will shift to child at age 18, normal Roth penalties for withdrawals outside of special circumstances

What I want to learn:
- if we did earnings as things like allowance and odd jobs (babysitting, mowing etc) how do we track/show those earnings and do we need to worry about tax implications on these?
- when it comes to FASFA and financial aid stuff, are amounts in 529s and Roth’s treated the same or similarly?

Anything else glaring I am missing?

[archiethedragon]

Jun 20, 2024 10:10:45 GMT -5 atarianna said:

I am trying to figure out which option makes more sense for our family.

We’ve been saving in the kids’ 529s since each of them were born. We don’t intend to cover their entire education and want some flexibility for how the savings can be used.

We have approximately $30k set aside for each child (all around age 10) in 529s which I know can be converted penalty free to a Roth if otherwise not used for education. We are considering pausing 529 contributions and opening custodial Roth’s instead; which seem more versatile (using $10k for the purchase of a home, can be used for education, contributions can be withdrawn penalty free) but want to ensure it’s a good decision.

What I know: $7k/year contribution limit; kids earnings must be at least 50% of total contributions to the account, custody will shift to child at age 18, normal Roth penalties for withdrawals outside of special circumstances

What I want to learn:
- if we did earnings as things like allowance and odd jobs (babysitting, mowing etc) how do we track/show those earnings and do we need to worry about tax implications on these?
- when it comes to FASFA and financial aid stuff, are amounts in 529s and Roth’s treated the same or similarly?

Anything else glaring I am missing?

The only glaring thing I see is this "kids earnings must be at least 50% of total contributions to the account".    I could not find any reference that online and my understanding is that the max that can be contributed to the account is the lesser of the federal limit or 100% of the person's earnings. 


Allowance will not count towards earnings.   Working for non family (ie babysitting, mowing, etc) could could but you would want keep a record of that and the kid may owe self employment tax on the earnings, so you would want to do a little due diligence  there. 


for FAFSA they are essentially treated the same.  

[ellipses84]

I’m wondering a similar question. I own my own consulting business and a colleague with a small business pays her son for helping out with random tasks when he’s at her office and I believe does the match. She has a couple other part time employees so I’m guessing he’s on actual payroll like they are. I’d love to do similar but it seems complicated. Maybe it’s ok if the kid’s “income” is low enough to not to have to pay or file taxes. A child who only has earned income from wages only has to file only if their income exceeds the standard deduction for the tax year which is $14,600 for 2024. Have any side hustles you could start an LLC for that your kids could help with?

[niq]

There have been some changes to the laws about these savings plan and you can rollover 529 funds into a Roth IRA for your kids. If you get a state income tax deduction for 529 contributions then the 529 is *probably* better. (but it depends on the fees that your 529 funds charge)

www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know