The College Savings Plan Rich Families Use (That You Probably Haven’t Heard Of)

You might recall my banker friend from a previous discussion. Well, I tapped her expertise again. Since we've been focused on saving for our children's futures, this time I asked for strategies for hitting two major financial goals for your kids at once: college savings and retirement. Here's the inside scoop she shared:

Imagine simultaneously growing your child’s college fund and laying the foundation for their future retirement. It might sound like a financial juggling act reserved for the wealthy, but there's a lesser-known college savings plan strategy that has quietly helped affluent families secure generational wealth – and the good news is, you don’t need deep pockets to take advantage of it.

Let’s dive into how using a Custodial Roth IRA in tandem with a 529 plan can give your child a powerful financial head start.

What Is a Kid Roth IRA and How Does It Fit Into a College Savings Plan?

What exactly is a Kid Roth IRA? Simply put, it’s a Roth IRA for anyone under the age of 18. While an adult (parent, grandparent, or guardian) must open and manage the account as the custodian, the child is the legal owner. The crucial element? The child needs earned income to contribute. Think babysitting gigs, dog-walking services, tutoring sessions, selling handmade crafts, summer jobs, or even income from monetized online content like TikTok.

📌 Pro tip: If your teen's income isn't reported on a W-2, maintain meticulous records using a spreadsheet to ensure IRS compliance.

Taking that summer job check to the bank

Now, how does this seemingly retirement-focused account fit into a college savings strategy? The beauty lies in the Roth IRA's significantly longer time horizon compared to a traditional 529 plan. If your child begins contributing as early as age 14, their investments could benefit from over four decades of compounding growth before retirement. This extended period of tax-free growth can transform even modest contributions into substantial wealth over time.

Real Numbers: Why Time Is More Valuable Than Principal

Consider this: your teenager earns $12,000 throughout their high school and college years and invests it in a Roth IRA focused on equities. Assuming an average annual return of 8% (for illustrative purposes), that initial $12,000 could potentially balloon to an impressive $206,948 by age 59 – even without any further contributions. That's the magic of compound interest working its long-term wonders.

Compare this to a more conventional college savings approach: investing the same $12,000 in a 529 plan when your child is born. With the same 8% return, that investment grows to approximately $47,952 by the time they turn 18. Still a valuable sum for college, but the long-term impact doesn't compare to the Roth IRA.

This is why financially savvy families often employ a blended strategy: utilizing 529 plans for shorter-term college funding needs and leveraging the Roth IRA for significant long-term growth.

More details on the differences

Should You Prioritize a College Savings Plan or Your Own Retirement Fund?

It's a common question for parents: should you prioritize your own retirement savings or your child’s education fund?

Ultimately, the answer is personal. Consider your own financial situation and priorities. Some individuals who have children later in life and have already established a strong retirement foundation might have more flexibility to focus on college expenses. However, a layered approach often proves most beneficial.

A Strategic Blend: Combining 529s for college costs with Roth IRAs sets your child up for future financial independence without jeopardizing your own retirement security.

College Savings Plan Hacks That Don’t Hurt Financial Aid

Here's a valuable insider tip: 529 plans owned by parents are generally considered in the FAFSA (Free Application for Federal Student Aid) calculations. However, 529s owned by grandparents or other non-parent relatives are typically not included until the funds are withdrawn. This can potentially increase the amount of financial aid your child is eligible for.

And here’s an even more exciting development: recent tax code changes now allow your child to roll over up to $35,000 in unused funds from a 529 plan into their own Roth IRA, tax-free, provided the 529 account has been open for at least 15 years. This means leftover college savings don't have to sit idle – they can continue to grow in a retirement-focused account.

This flexibility between account types creates a remarkably effective college savings plan.

Final Thoughts: Build a Smarter College Savings Plan

The most effective financial strategies often involve a multi-pronged approach. By intelligently combining the benefits of Roth IRAs, 529 plans, and even family support, you can create a powerful college savings plan that simultaneously addresses educational costs and long-term financial security.

You don’t need to be among the ultra-wealthy to adopt their savvy financial mindset. It simply requires the right knowledge and a touch of strategic thinking.

Final Thoughts: Think Like the Rich — Even If You Aren’t — Build a Smarter College Savings

Most families juggle saving for both retirement and college. Wealthy families often have a well-defined playbook:

• Start early

• Utilize Roth IRAs for children with earned income

• Strategically structure 529 ownership

• Let the power of compounding work its magic

  
  

These tools need no longer be exclusive to those at the golf course.

🔄 TL;DR: Actionable Steps You Can Take Today

✅ Open a Custodial Roth IRA for your child if they have earned income.

✅ Keep meticulous records of your child’s earned income.

✅ Consider having grandparents, aunts, and uncles own the 529 plan for potential financial aid benefits.

✅ Familiarize yourself with the rules regarding 529-to-Roth IRA rollovers.

✅ Share this valuable information with other parents you know!