Financing College

Where to Put Those Hard-Earned Bucks

By Felicia Hodges

With so many different ways to build a college savings portfolio, how do you know the best avenue for your family?

"A comprehensive plan, incorporating budgeting, college, retirement, major purchases and risk management, is essential to the successful accomplishment of all of a family's goals," says Kirk Fine, a financial advisor with Waddell & Reed Financial Services. Listed below are some of the most common ways families just like yours look to fund their children's education. Since all of these methods may be affected by your family's individual tax situation, consult with a tax advisor or financial planner for further specifics.

Generally considered relatively safe investment vehicles, savings bonds are fully backed by the U.S. government. Their rate of growth is relatively slow (maturity takes a number of years), so used as a single source for college savings may not yield enough to keep up with the rate of inflation.

Traditional IRA contributions may be tax-deductible depending on your income, and the earnings grow tax-deferred. Roth IRA contributions are not tax-deductible, but qualified withdrawals can be made without being taxed if certain requirements are met. Withdrawals from either IRA can be used to pay for qualified higher education expenses without the 10 percent IRS early withdrawal penalty.

Although the earnings from Education IRAs can be withdrawn tax-free if used for qualified higher education expenses such as tuition, room, board or books, they are not very useful as a single source for college savings. The most that can be contributed each year is $500, which is much less than what most families need to save. In addition, according to Chevy Chase Trust Managing Director and Chief Trust Officer David Keister, contributions to an education IRA also affect your ability to use government educational tax credits.

Want to see more?

• Financial Finesse. Through national seminars, a radio show and its Web site, this company helps educate women on how to better invest and save money, including saving for their children's education.
• Check out the answers to other financial questions in our lifestyle section.
• Wired Scholar. An inclusive online resource for college preparation that features evaluation, selection, application and financing.
• The College Savings Plan Network. Online resource listing specific information about state college savings plans.
• The Dads' Place Discussion Board