Great question and the answer for the most part is yes! I get this question a lot. One of the reasons it is questioned, is that when it comes time to file the FAFSA, the assets in 529 accounts will be taken into consideration. After all, it is money you saved for college! But here is the deal: it is better to open the 529 account in the parent's name with the child named beneficiary. Here's why: in determining EFC or estimated FAMILY (not parents) contribution, the student's assets (529 account for one) are assessed at 20% versus the parent's at 5.65%. Family members can make gifts to the 529 accounts to help or open their own with the student named as beneficiary. Earnings in a 529 grow tax free until withdrawal and when used to pay for higher education expenses are tax free. But what if little Johnny doesn't go to college? Money saved in 529 accounts that is not used for educational expenses will become fully taxable as ordinary income and subject to a 10% penalty.
There is another often overlooked alternative: Roth IRA. Roth IRAs can be used for college expenses in addition to retirement income. These accounts grow taxed deferred and are exempt from withdrawal penalties if the funds are used specifically for qualified educational expenses. For the most part, only the contribution portion of the Roth IRA balance can be withdrawn tax-free. Roth IRAs also offer a bit more flexibility over the 529 plans. Any left over funds after withdrawing for college expenses (good luck with that one!) can be converted to retirement income with no tax consequences or penalties. And since the Roth IRA is considered a retirement account, funds there are not considered when calculating the EFC. Roth IRAs do have drawbacks though. There are contribution limits, you need to have earnings in order to contribute, and there are income limitations. But used in combination with 529 accounts, Roth IRAs can be a great supplement.
