The Best Way to Save for Your Child’s College Expenses

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Step 1

Determine if a Roth IRA is an option by first calculating your age when your child begins college. If you will be over 59 1/2 years old this may be your best option. You can save after-tax dollars and earn tax-free earnings to use for education. You have the option of using this money for anything penalty free provided you are 59 1/2 years old during the distribution. However, if you will not be 59 1/2 years old or if you are currently maximizing your Roth IRA contributions for other purposes, move on to step 2.

Step 2

Start a 529 College Savings Account. This investment tool also lets your after-tax dollars grow tax-free provided the money is used for college expenses. The list of acceptable college expenses is very broad and included everything from books to board.

Step 3

Investigate different 529 programs. The programs are setup in most states and have different investing options. Look at all the differences including what investment options you will choose, the amount you are going to contribute and whether or not the contributions are deductible from your state income tax amount. The different state plans vary in each of these areas. Typically if you invest in a state’s plan that you have taxable income in, the contributions can be deducted from your income tax.

Step 4

Just as you should invest more aggressively at younger ages and more conservative as you grow older, the same applies to your 529. If your child is young or unborn, invest aggressively while invest more conservatively as your child nears college age.

Step 5

Do not concern yourself with whether or not the child will attend college. You are the owner of your 529 plan and can change the beneficiary anytime you choose. If your child does not attend, use it for a class for yourself or simply save it for a grandchild. In a worst case scenario, you can get a distribution while paying a ten percent penalty if the funds are not used for educational expenses, however if you have been saving for years, compounding your interest, ten percent can be a small price to pay for tax-free earnings.

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