New parents always want to start saving for their child’s college education. People often ask me what’s the best way to do that?   To be honest, for different circumstances I give different answers, but these are some of my standard recommendations.

First, before you put any money into a college savings plan, make sure that you have enough money in your emergency savings fund. You should have enough money in savings to cover at least three months worth of expenses (I prefer to see six.)  If you lose your job or have some other financial emergency, putting food on the table and a roof over your child’s head ranks over having money for college. People fight with me over that, they say, “No, I want to have money I won’t spend.” Bingo, that’s why it’s called savings. Think of your savings account as your college fund, it’s just step one.

Once you’ve got that established, I like to see money in a Roth IRA. Once again, this isn’t a college fund, but it makes sense financially. First, a Roth IRA can be used to pay for college expenses penalty free.   Also, because you get no tax break for contributing to a Roth, you pay no income tax on the money when taking it out.   And it grows tax free, so a Roth is a good vehicle for college savings.  Secondly, suppose your child decides not to attend college or manages to get a free ride at a University? Well, then you’ve just got more retirement money sitting around for you. (Sweet.) Third, let’s say you’re not financially able to pay for all of Junior’s tuition and you need to apply for financial aid. Money in a child’s 529 plan is considered to be fully available to pay for college. Money in an IRA is not. Your financial aid package will be better if your funds are in a Roth.

One more point in favor of paying towards retirement before paying for college. When push comes to shove, if there is no money for college, a motivated kid can get a loan for school. But if you’re 70 years old and your only income is your Social Security check, do you honestly think a bank will give you $100,000 to help you with your retirement expenses? It’s not going to happen.  It’s kind of like the airplance emergency demonstration, you need to put on your own oxygen mask first,  before you help someone else.

So let’s say you have all your bases covered, you’ve got savings and you’ve got retirement money, then what? Now we can start with the 529 plans. Although there are no federal tax benefits for 529 plan contributions, they do grow tax free. Also, many states exempt a portion of your income from tax when you contribute to their state plan. For example, in Missouri, you can contribute $8,000 a year tax free to a 529 plan. If you’re married, both spouses can contribute– giving you a $16,000 tax deduction. Here’s a link to their website:

http://www.treasurer.mo.gov/Most.asp

The most important thing about saving for college is to start.  You won’t believe how fast your kids grow up until they’re already grown.  By then it’s too late.  Good luck.