Our current financial goals have us balancing debt-reduction with saving for the boys’ education. As I mentioned earlier this year, we’re banking as much money as possible so we can pay off the mortgage (which is our only debt) or have plenty of cash to pay for private school in a few years. College savings is also on our minds as the Forbes list of America’s top colleges shows that tuition at these schools is pretty in the $50,000 range right now (and I hate to think of what it will be in 12 years, when my oldest is heading off to college).
While it’s hard to say if we’re saving “enough,” I’ve been thinking a lot about how we can maximize the money that we are saving until we need it. Right now, we’re looking at needing the money in about five years – either to pay off the mortgage or to start paying for private school tuition. That’s not long enough for even moderately aggressive investments. We’ll actually have to be fairly conservative.
The first place I’m going to park more money is the boys’ Coverdell accounts. The annual contribution limit is $2,000 per child and grows tax-free (higher income families should note the contribution limits). As of right now, money from Coverdells can be used for expenses during grades K through 12, so it’s a great option for us with our plans to start paying for private school as early as sixth grade. (Congress will need to extend those K-12 benefits beyond 2012, but I’m confident they will, and if they don’t, the money will be there for college.)
The next option I’m considering is my Roth IRA. I’ve had it since college, although I haven’t contributed much since I had a 401(k) until I quit my job last year. I’ve been planning to contribute to my Roth anyway since I’m no longer building up retirement savings in other accounts. The nice thing about Roths is that although they are retirement accounts, income tax has already been paid on contributions so they can be withdrawn at any time. Earnings can be withdrawn without being subject to an early withdrawal penalty if the money is used to pay for the kids’ college expenses. So this would really be a long-term savings option, but one we were going to use anyway because of the retirement savings aspect.
For both the Coverdell and Roth investments, we could pick very conservative options that would have little risk with tax-free growth (though we would likely be more aggressive with the Roth since the money will sit there longer).
The other option I’m looking into is a money market account – they are earning a bit more than traditional savings accounts, and there are some tax-advantaged accounts that would allow our money to grow tax-free. Money market accounts are not FDIC insured, but are considered to be extremely low-risk investments. I’m just not sure the extra yield is worth the lack of FDIC insurance, given that the difference is so small right now with how low interest rates are (around 1/2 percent).
CDs (Certificates of Deposit) are also an option, but again, the difference between the return on CDs and the return on traditional savings accounts is so small that I’m not sure it’s worth tying up our money.
The market just doesn’t seem to be rewarding savers right now, although that’s no reason not to save money. In fact, economic conditions are such that I’m thankful every day that we have savings. I’d just like to make the most of those savings!