College costs aren’t slowing down, and most families face the challenge of funding higher education without jeopardizing long-term financial goals. The good news is that with some thoughtful planning, you can build a college fund in a way that’s tax-efficient, financially aid-aware, and flexible enough to handle whatever comes your way.
Two tools worth knowing well: 529 college savings plans and Roth IRAs. Used together strategically, they cover a lot of ground.
Starting with the 529
A 529 plan is the workhorse of college savings for good reason. Money grows tax-deferred, and as long as you use it for qualified expenses — tuition, fees, books, room and board — withdrawals come out completely federal tax-free. Depending on your state, you may also get a deduction or credit on your state return just for contributing, which is essentially free money.
One thing Texas families should understand upfront: Texas has no state income tax, which means you won’t get a state tax deduction for 529 contributions the way residents in states like New York or Virginia do. That said, the federal tax-free growth and withdrawal benefits are identical regardless of where you live. You’re also not required to use a Texas-sponsored plan; some families choose out-of-state plans with lower fees or broader investment options, which may be a more reasonable approach when there’s no state deduction on the table.
Financial Aid Considerations
From a financial aid standpoint, 529s are structured favorably. When a 529 is owned by a parent, it’s treated as a parent asset on the FAFSA and assessed at a maximum rate of 5.64% in the Student Aid Index (SAI) formula — the measure that replaced the old Expected Family Contribution (EFC) starting with the 2024–25 FAFSA. Compare that to assets held directly in a child’s name in a non-529 account, which can be assessed at up to 20% — a meaningful difference if financial aid is part of your strategy.
There’s also an important update worth noting: starting with the 2024–25 FAFSA, grandparent-owned 529 withdrawals are no longer reported as student income. That means grandparents can now contribute to or distribute from a 529 without negatively impacting their grandchild’s financial aid eligibility — a significant change for multi-generational planning.
What If You Save Too Much?
Non-qualified withdrawals do trigger taxes on earnings plus a 10% penalty, but you’re not necessarily stuck. 529 accounts can be transferred to another family member of the beneficiary — a sibling, a cousin, even yourself if you decide to go back to school. And as of recent law changes, there’s now an even better option for leftover funds.
The 529-to-Roth IRA Rollover: A Game-Changer for Overfunded Accounts
One of the more meaningful recent changes in the law is the ability to roll unused 529 funds into a Roth IRA for the beneficiary. If your child graduates with money still sitting in a 529, it doesn’t have to just sit there — or worse, get withdrawn with a penalty. Instead, it can become the foundation of their retirement savings.
A few rules to know:
- The lifetime rollover limit is $35,000 per beneficiary
- Annual Roth IRA contribution limits still apply ($7,500 in 2026; $8,600 if 50 or older), so you’ll likely spread this over several years
- The 529 must have been open for at least 15 years
- Only funds — contributions and their associated earnings — that have been in the account for more than five years are eligible for rollover. Contributions (and their earnings) made within the last five years do not qualify.
- The beneficiary must have earned income at least equal to the rollover amount for that year
- The Roth IRA must be in the beneficiary’s name, not the account owner’s
- The transfer must be a direct, trustee-to-trustee rollover
It’s not a loophole, but it is a genuinely useful off-ramp for families who save diligently and end up with more than they need. The money that was meant to launch a child’s education can end up launching their retirement instead.
One bonus for higher earners: unlike regular Roth IRA contributions, the normal income limits don’t apply to 529-to-Roth rollovers. So even beneficiaries with high incomes can take advantage of this strategy.
Mistakes Worth Avoiding
A few patterns that tend to trip families up:
- Overfunding a 529 without a plan for the excess — now less of an issue with the rollover option, but still worth monitoring
- Treating a Roth IRA as a substitute for a 529, which puts retirement savings at unnecessary risk
- Putting money in a child’s name in a non-529 account without considering how that affects financial aid eligibility (assessed at up to 20% vs. 5.64% for parent-owned 529s)
- Withdrawing 529 funds for non-qualified expenses when other options are available
- For Texas families specifically: assuming that because there’s no state income tax deduction, a 529 isn’t worth it — the federal benefits alone make it a strong vehicle
The Bottom Line
Saving for college is really about balancing three things: growth, flexibility, and financial aid strategy. A 529 gives you the tax-advantaged growth engine. A Roth IRA gives you flexibility. And the 529-to-Roth rollover gives you a safety net if plans change.
For Texas families, the absence of a state income tax actually simplifies one part of the decision — you’re free to choose a plan with the best investment options and lowest fees, whether that’s a Texas-sponsored plan or one from another state. Either way, getting this right and keeping it aligned with your broader financial picture is exactly where working with a financial advisor makes a difference.
College funding doesn’t have to come at the expense of everything else you’re building.
Ready to build a college savings plan that works alongside your other financial goals? Contact us to start the conversation.
Goodman Financial Corporation is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training. More detail, including form ADV Part 2A filed with the SEC, can be found at https://adviserinfo.sec.gov/. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax, or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.
