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College savings: What's the best investment plan?

College savings can be tricky, because some come with a tax penalty if too much is put away. A Roth IRA for your child, to be used for educational purposes, can be a good college savings option. Question 6 in this week's mailbag. 

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Q6: Other savings beyond 529s
One of our priorities is to pay for our kids’ college educations so that they can avoid taking out student loans. We also want our kids to have as many options as possible when it comes to education and not to be limited by financial constraints. Thus, we’re talking about having to save up to several hundreds of thousands of dollars per kid (we have two very young kids and will probably have one or two more) even after scholarships and grants.

We’re aggressively funding 529 accounts for our kids but know that if we end up saving too much we will get hit with a 10% penalty for any income that doesn’t get used for education. Thus, it doesn’t seem smart to use 529s as the sole savings vehicle.

What would you recommend we use as a secondary savings vehicle here that might allow for some tax benefits if the funds don’t get used for education? We don’t qualify for a Roth and in any event we won’t be close to being 59.5 years old by the time our kids go to college. 
- Sean

Does your child qualify for a Roth for themselves? If they earn income in any fashion (even young children can earn money from modeling or acting or other things), they can put that money into their own Roth, which can then be used for educational purposes.

The catch, of course, is that the Roth belongs to the child, which means they can do whatever they want with it in the long run.

If I were you, though, I would just put it in an unrestricted investment account in their name. This gives them the most flexibility later on in life, which seems to be what you want given your 529 concerns.

Sean has a second question related to this one.

Q7: Communicating about college savings
Secondly, what do you think we should communicate to our kids about these college savings funds, if anything? I think they should understand that we have saved for their educations but I don’t think we should disclose dollar amounts (so that they can stay hungry for scholarships, etc.). Thoughts?
- Steve

There’s a balance here.

In my own situation, I didn’t even bother to seriously apply for schools I could have been admitted to because I was under the belief that my parents had nothing saved for me (which was actually the truth).

I think you can be vague about the amount, but if you can support any of their ambitions, you need to make it very clear to them that they can make it work if they want to apply to MIT or Harvard.

Q8: Sharing child tasks
I keep seeing the same sets of parents at many things that I take my own children to, like dropping them off at preschool or goig to soccer practice. It seems to me like it would make sense for us to find ways to share these efforts, but I don’t know how to get the ball rolling.
- Margie

It’s difficult to do this if you don’t have a relationship already built with those parents.

My suggestion is to build a social connection with some of them first. Invite some of them over to dinner at your home so your children can play together and you can get to know each other better. Ideally, they’ll reciprocate later on.

When you’ve built a connection, then suggest a sharing arrangement where you split the responsibilities for pick-ups and drop-offs.

We’ve done this with some of our neighbors with wonderful time savings for both of us.

Q9: Cash in wallet
How much cash should I be keeping in my wallet? It seems risky to carry too much (robbers or losing the wallet) or too little (caught without cash in a pinch).
- Joe

The simplest answer is to keep what you’re comfortable with. Some people feel better with more and others with less.

If you feel like you’re carrying too little, you’re probably carrying too little. If you feel like you’re carrying too much, you’re probably carrying too much.

I usually try to have $50 in cash nearby when I’m out and about.

Q10: Book suggestions
I was wondering if you had any suggestions for suspense/thriller authors or titles for me to read.
- Ronald

“Suspense/thriller” is a pretty broad category.

You might like psychological thrillers like Before I Go to Sleep by S. J. Watson.

You might like technology-filled suspenseful novels with great action scenes like REAMDE by Neal Stephenson.

I had more fun reading Ian Fleming’s Bond novels (like On Her Majesty’s Secret Service) when I was in my early twenties than almost anything I can think of in the category you describe.

Perhaps one of these options will give you something to work on.

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