Parents need as many flexible and multi-purpose ways to save for college as possible.
Back-to-school season always reminds me of the gargantuan chunk of money it's going to take to get my two kids through college, even though my oldest won't finish high school until 2026.
Parents need as many flexible and multi-purpose ways to save for college as possible, and it's better to start sooner than later. By flexible, I mean money that can pay college bills, be used for retirement or pad an emergency fund if Junior decides to skip college or gets a scholarship.
In addition to the state-run College Advantages 529 plan, parents might want to consider feathering the education nest with government-backed savings bonds. They're low risk, and "if the savings bonds are not needed for college, the parents can use the money as an emergency fund," or for their own retirement, said Columbus-based certified financial planner Jill Gianola.
"I suggest savings bonds and Roth IRAs to clients who really can't afford to earmark a bunch of money strictly for college because they need an emergency fund or they have to keep saving for their own retirement," she said. "Both investments are 'triple-use' - they could be used for emergencies, for college or for retirement."
Roth IRA money used for education expenses is exempt from the 10 percent penalty on withdrawals for those under age 59 and a half and, if it's not needed, can still be used for retirement.
In traditional 529 and college accounts, "you can't reasonably use this money as an emergency fund because you pay penalties and taxes if the money is not used for college," she said.
Just beware. With bonds, "the return is low, although it's better than CDs," Gianola said. The main draw is their flexibility and relative safety compared to the stock market.
"Series EE" bonds earn an annual fixed interest rate, based on the current market rate when purchased, or about 0.20 percent until the end of this month, for up to 30 years. "I" bonds pay a fixed rate of interest as well as a special rate based on current rates of inflation (for details and tax information on using these to pay for college education, go to treasurydirect.gov/forms/savpdp0051.pdf).
"I like (inflation-protected) I bonds because they can be used for college or as an emergency fund," Gianola said.
As for savings bonds, the only hitches: The bonds must be in the parent's name when they are purchased, because the buyer must be at least 24 years old to qualify for the education tax break. And "if your income is under the IRS limit when they're cashed in, the interest earned on the bonds is tax-free," Gianola said.
In 2013, the benefit starts to phase out when a couple's income is more than $112,050 and completely disappears when greater than $142,050.
It's also important to remember savings bonds won't post big gains, but they do offer stability and security. "The yields are terribly low. Despite the tax-free benefits, there is little potential gain," said Brad Huffman, financial planner with Future Finances in Worthington. "These instruments work much better in a higher (interest) rate environment."
-Denise Trowbridge is a self-professed money geek who writes about personal finance, banking and insurance for The Columbus Dispatch, bankrate.com and middlepathfinance.com.