If you’re planning ahead for your child’s future, you’ve probably come across two common options: a 529 college savings plan and a custodial Roth IRA (Roth IRA for children).
Both accounts offer meaningful tax advantages but serve very different purposes. We’ve provided a clear breakdown to help you choose the right option for your family.
What is a 529 Plan?
A 529 plan is a tax-advantaged investment account designed to pay for education expenses (i.e., college tuition, books, room and board, and some K–12 costs). It’s best for families who are confident they’ll use the funds for a college education.
Pros
- Tax-free growth and withdrawals for education expenses
- High contribution limits (often $300K+)
- Potential state tax deductions
Cons
- Limited flexibility — penalties and taxes apply if used for non-education purposes
- Shorter investment window
What is a Roth IRA for Children (Custodial Roth IRA)?
A custodial Roth IRA is a retirement account for a minor, funded by earned income. A parent or guardian manages the account until adulthood, at which point it becomes a standard Roth IRA. It’s ideal for families focused on long-term wealth building, flexibility, and financial education.
Pros
- Tax-free growth and tax-free withdrawals in retirement
- Contributions can be withdrawn anytime without penalties
- Can be used for penalty-free education or a first home purchase
- Decades of compounding potential
Cons
- Requires documented earned income
- Lower annual contribution limit ($7,000/year in 2025, $7,500/year in 2026)
A side-by-side comparison
| 529 Plan | Custodial Roth IRA (Roth IRA for children) | |
|---|---|---|
| Primary purpose | Education | Long-term wealth + retirement |
| Spending flexibility | Low | High |
| Penalties | Yes if non-education | None on contributions; may apply to early withdrawals of earnings |
| Time horizon | 4–15 years | 50+ years |
| Requires earned income? | No | Yes |
The power of compounding
The true value of these investment accounts lies behind the power of compound interest. If a child contributes $2,000 a year from ages 12 to 18 at 8% growth:
- 529 plan: Grows to ~$18K by 18 — any unused funds can be rolled over into a Roth IRA (within IRS limits).
- Custodial Roth IRA: Grows to ~$18K by 18 and — without any additional contributions — ~$350–420K by 65, completely tax-free.
Where Halfmore fits in
To fund a custodial Roth IRA, a child must have verifiable earned income: often the biggest barrier for parents.
Halfmore helps parents create IRS-compliant payroll within your own household, ensuring each task is properly structured and documented so earnings qualify as IRS-compliant, legitimate earned income. With clear records in place, parents can confidently contribute to a custodial Roth IRA and start building wealth early.
So which should I choose?
Both accounts play an important role for your child. If your primary goal is a dedicated, tax-advantaged college fund, a 529 plan is the best option. Otherwise, if you’re looking to build long-term wealth and flexibility for your children, a custodial Roth IRA is an ideal tool. Many families use both — a 529 for education, and Roth IRA for long-term independence.
Any information provided does not constitute tax, legal, or accounting advice. These materials are intended for general informational purposes and should be relied upon as specific advice. Any communication through email constitutes subject matter should still be considered of a general discussion nature. U.S. Treasury regulations require us to provide the information contained in paragraph to you. Unless expressed stated otherwise, any U.S. federal tax advice contained in this publication was not intended or written to be used by any taxpayer for the purpose of avoiding any penalties that may be imposed by the U.S. Internal Revenue Service.
