529 College Savings Plans and Coverdell Educational Savings Accounts are not Roth IRAs, but have one similarity. Like a Roth IRA, funds invested in a 529 Plan or an ESA are after-tax dollars, so the investments grow tax free, and funds can be withdrawn tax free (subject to specific rules).
Unlike the Roth IRA, both 529 Plans and ESAs are education plans that are meant to be used early in a kid’s life for educational purposes. The 529 Plan is meant for a college education, while an ESA can be used for any educational purpose from elementary school through college. (Each has benefits and limitations, and different rules apply.) These plans generally are started early in a kid’s life by his or her parents, guardians, grandparents,, or others, and the kid may not even know the plan is in existence until the kid too begins planning for college. Because of the relatively short time the funds have to grow and compound, these programs do not match the long-term growth potential of Roth IRAs. However, the kid that is the beneficiary of such a plan is very fortunate, and all parents, guardians, and grandparents should strive to establish such a program for their kid (grandkid) as soon as he or she is born.
Because the kid is not involved in establishing the 529 Plan or ESA, and because the kid does not have to work to generate earned income to invest in them, and because the plans do not have the potential educational support structure of IRAKids Clubs, they have limitations for teaching financial literacy to kids and helping them learn to become informed and successful investors. Also, these plans do not have the extraordinary compound growth potential that early investment in a Roth IRA can provide. Therefore, we encourage the establishment of 529 Plans or ESAs for kids as soon as they are born, and then, as soon as the kids have adequate maturity to establish their own Roth IRAs, to encourage and support their efforts to do so and help them advance their financial literacy through participation in local IRAKids Clubs.
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