My kids’ college savings

Saving for college is a top priority in our single-income family. Here’s how we do it.

About a week before my birthday when I was a kid, cards began arriving in the mail from distant relatives, all Polish-Americans. I loved opening them and taping them around the mirror of my dresser. But more fun was unfolding the card for the first time and watching the pair of dollar bills float to the floor.

Just as quickly as they landed, however, my mother scooped them up and headed to the bank to deposit them in an account set up for my college education. Knowing my relatives, I’m sure they were pleased. My mother certainly looked happy as she filled out the deposit slip. Even as a young kid with a hunger for toys and cute clothes, I understood the need to save for the day when I would enter the local university.

My Polish relatives are all gone now, and my kids, ages 5 and 8, rarely get cards with money tucked inside. I don’t know if I’d have the fortitude to snatch their booty from them, anyway. With what little we can afford, though, we’ve set aside for our kids’ future higher education expenses.

Roth IRA

The Roth IRA presents a great saving opportunity for middle and lower income families. You get a tax credit (with income less then $50,000 for joint filers), and your money earns untaxed interest until you withdraw it. You can always take out your contributions tax- and penalty-free. Withdrawing earnings to pay for higher ed expenses before age 59-1/2 gets you out of paying a 10 percent penalty. If your kid gets a great scholarship or decides against college (don’t fret—look at Bill Gates), keep the cash for your retirement.

Our family: I tuck our savings in a Roth IRA.

Coverdell College Savings Account

Like Roth IRAs, these are for middle and lower income families ($95,000 for single filers, $190,000 for those who file jointly). There is no federal tax credit, but all withdrawals, including the earnings, are tax free if used for higher education expenses. Before the Tax Reconciliation Act of 2005, these accounts, which are held in the name of the student, could adversely affect financial aid awards. Currently, a Coverdell account won’t count as a student’s asset and should not offset need-based financial aid.

My family: A couple Coverdell accounts

529 plans

No income limits make this savings vehicle great for higher income families and now less likely to impact financial aid for the non-millionaires among us. High fees plague some of the plans.

My family: Two different state plans.

Lest we sound like millionaires, the sum of our savings is less than the cost of a semester at Harvard.

tags: college savings, Roth IRA, 529 plans, saving for college