“Use a Roth IRA instead of a 529," many people will tell you. "It's better for financial aid since it doesn't count as an asset." Some people will tell you the same about insurance policies, but those people are insurance salespeople who just want a commission. Deciding whether to use a Roth IRA is a little bit more complicated.

Roth IRAs and 529s work similarly: you don't get a tax deduction for your contributions, but growth and distributions are tax-free. Tax-free has its limits in both cases: tax-free distributions from a 529 are only for Qualified Higher Education Expenses; you can take tax-free distributions of your Roth IRA contributions at any time, but any growth in the account is only tax-free if withdrawn after age 59-1/2. (For example, suppose you contributed $2,000 to your Roth IRA every year for 10 years, and after 10 years the total value of the account is $35,000. 10 x $2,000 = $20,000 is your contributions, which you can withdraw. The remaining $15,000 is growth, which you can't touch tax-free until you're 59-1/2.)

With that background out of the way, let's deep dive into both options as college savings vehicles.

FAFSA Treatment

• Asset: A 529 is an asset on the FAFSA; a Roth IRA is not. That means that 529s increase the student's Expected Family Contribution by 5.64% of their value: every $10,000 in a 529 reduces financial aid eligibility by $564. $10,000 in a Roth IRA has no impact on EFC because retirement accounts don't count.

• Income: Roth IRA distributions-- even though they are not taxable-- are included in income on the FAFSA. The FAFSA uses total income-- taxable and untaxed-- not just adjusted gross income. With the marginal income assessment rate on the FAFSA 47%, spending $10,000 from your Roth IRA will reduce financial aid eligibility by $4,700. 529 distributions, on the other hand, are not reportable so they do not impact EFC or aid eligibility, except insofar as they reduce the value of the 529 as an asset. Even though the FAFSA uses prior-prior year income, Roth distributions are the parents' income which means that they impact financial aid eligibility until January of sophomore year of college of the youngest student in the family. This might not matter much for a family like mine, where all the kids are the same age, but if you have three children who are each two years apart in age, one will have graduated from college and another will be in their final year before you can access Roth IRA funds without paying a price in financial aid.

Dollars Available

• Contributions: If you won't turn 59-1/2 while your student is in college, you can only use your Roth IRA contributions, not the growth in the account. In the above example of contributing $2,000 per year to a Roth IRA, after 10 years you would have $20,000 available to pay for college, regardless of the full account balance. That translates to $5,000 per year of college, assuming four years.

• Growth: If you put the same $2,000 into a 529 every year and invested in an age-based portfolio, your account would be worth around $32,000 after 10 years. And all of it is available for college. That translates into $8,000 per year for college, again assuming four years.

Eligible Expenses

• Qualified Higher Education Expenses: 529s can be used tax-free for QHEEs, which include tuition, fees, room and board (on- or off-campus), books, required supplies and a computer. Anything other than that results in a "non-qualified distribution" in which the earnings portion of the distribution is subject to income tax and a 10% penalty. In the above example with an account worth $32,000, of which $20,000 is contributions, 37.5% of the account is growth and thus taxable. That means that a $1,000 non-qualified distribution would result in taxes and a 10% penalty assessed on $375.

• Other costs of attendance: College has plenty of costs that are non-qualified: transportation, health insurance, personal expenses, activity fees, ... the list goes on. None of these can be paid by a 529. So families do need a source of college funds other than their 529, which could be a Roth IRA.

Tax Credits

• The American Opportunity Tax Credit is worth $2,500 per year, per student, a total of $10,000 over four years. The IRS doesn't allow you to double-up on tax benefits, though. So in order to claim it, parents need to spend $4,000 from something other than a 529 account. A Roth IRA could fit the bill here, as could out-of-pocket spending, spending from a regular taxable savings account, or a student loan.

Roth vs Taxable Investment Account

A taxable investment account is an investment account that's not specifically for retirement. Funds are accessible at any point. Growth and income in the account are taxed when realized: dividends are typically paid out on an ongoing basis and are taxable when they're received. Selling a stock or fund triggers taxable capital gains; if the stock has been held for more than a year before selling, it's taxed at the more favorable long term capital gains rate.

A taxable investment account is included on the FAFSA as an asset, just like a 529. Like a Roth IRA, it has no restrictions on what it can be used for, and you can claim the AOTC for expenses paid by a taxable account. On the income side, the taxable account falls between the 529 and the Roth IRA: Only the growth in the account is reported as income, and only if it's recognized through a sale or dividend distribution. For example, if the 529 above, with $20,000 in contributions and $12,000 in growth were a taxable account and $8,000 were withdrawn to pay for college, taxes would be due on the $3,000 of growth in the account and that $3,000 would be income on the FAFSA. (A taxable account that has been funded over multiple years will have have investments that have different amounts of gain where the parent could choose more favorable ones to sell.)

All in all, a Roth IRA can have a place in a family's college savings plan, but how much of a place depends a lot on the family: how many children are there and how far apart in ages are they. While the Roth doesn't count as an asset on the FAFSA or CSS Profile, 100% of the distribution counts as income, and that's a much bigger penalty in the aid formulas than the asset would be. A taxable investment account is in many cases a more beneficial approach for a family that wants flexibility beyond just 529 accounts.

Here's a question I can't answer in this article: Does using your Roth IRA for college shortchange your retirement? One big challenge with Roth IRAs is the annual contribution limit, currently $6,000 for those under 50 and $7,000 for those 50 or older. Given low contribution limits, many people need all the Roth dollars they can save just for retirement.

Unsure about how to save? How much college costs? How to get on the same page with your kiddo about college? My College Financial Plan Masterclass leads you through the steps of building out a college plan, from savings to FAFSA to scholarships, tax credits, college choices and so much more! If you're the parent of a college-bound high school student, this is your one-stop answer to all your college questions.