Looking for college savings suggestions

[Guest nathannah]

Hello, my husband has about $6000 sitting in a 401k plan from an employer he left 5 years ago (only was employed there for one year). We have another 401K now with the current company, and that's where we're doing our serious retirement saving. We recently realized that we really need to start planning for our children's future college education (we have a 2 1/2 year old, a 10 month old, and new baby on the way, and we do plan on having more children later) Rather than dipping into our short term savings accounts to start college funds, we would prefer to roll the money over from the old 401K plan. While mutual funds seem the best way to go with college savings, my understanding is that in order to not pay a penalty, we would need to roll it over into an actual plan, not just invest in mutual funds.

Would a Roth IRA be a good plan for this? Or are there any suggestions on a good plan to roll that 401K $ into for college savings? Also, we don't want the money in the kid's names because it could hurt their chances of receiving financial aid in the future.

One more question - is it possible to have SEVERAL Roth IRAs opened in our name? (One for each child, just not in the kids' names)

Sorry for my ignorant questions - I'm very new to the whole financial planning world and am trying to educate myself!

Thanks for any feedback!

[John G]

You have asked a lot of big questions. I will address some of them.

Note that over the time frame you are talking about, options are sure to change as well as how colleges evaluate your situation. Also, there is some variation in how colleges evaluate different asset pools. For example, Carnegie Mellon does not count home equity. Some discount or do not count retirement assets. Most expect virtually all the assets in a childs name to be "consumed".

You asked about starting several Roth IRAs. You can only contribute to a Roth if you or your spouse has "earned income"... payroll, salary, etc. It looks like both you and your spouse could contribute 2,000 each year to two separate Roths. That limit is likely to be bumped up with legislation that is in Congress. Yes, you can have multiple Roth IRAs but your max contribution for all is currently 2k and all accounts will be in your or your spouses name. Unless your children have earned income, they can not have their own Roth. A Roth for children is clearly possible once they have summer jobs, babysit, mow lawns, etc.

There is a childs educational Roth which allows $500 to be contributed each year. Two negatives with the educational Roth: (1) $500 a year over 18 years probably only pays for one year of college, and (2) these funds are usually counted more heavily in the financial profile use in college aide.

In the last few years, a wide range of state college savings programs have emerged. For example New Hampshire has set up a plan with Fidelity brokerage. There are now dozens of these plans, which generally allow a much larger amount each year to be sheltered. Initially they focused on accumulating funds for colleges in the home state. Most are now flexible about that point. Maybe another reader can add a Kiplinger or Consumer Reports reference to a comparison article on these plans... I remember seeing one in the past year. Or perhaps there is a comparative web site.

Other options to reduce college expenses: staying in-state for lower tuition, military academies, ROTC scholarships.

A practical suggestion: subscribe to Kiplinger Financial magazine and spend 2 hours each month reading about investing, Roths and college savings. I think it is the best mag for those getting started.

[John G]

Here are some useful references to state 529 college savings/investing plans:

http://www.forbes.com/forbes/2000/1030/661...388a_print.html

http://www.collegesavings.org/

http://www.kiplinger.com/magazine/archives...ary/college.htm

The following web address is Fidelity's comparison of various college savings plans. They divide the options between parents and grandparents/other. There are fact sheets on five common options.

http://personal400.fidelity.com/planning/college/

[wmyer]

There are a number of options. I hope this is helpful: First, you can leave the $6,000 in the 401(k) plan, where it will continue to grow tax-deferred until you need to withdraw it to pay educational expenses. It's possible that with the 401(k) you may not be paying any annual fees, and that the mutual fund expenses are lower than you would get with an IRA. Second, you can roll the $6,000 over to a traditional IRA. You cannot roll the money directly over to a ROTH IRA, but you can convert the money to a ROTH if you meet the eligibility requirements. The money would have to remain in the original participant's name (i.e. your husband) for it to be a rollover. It would not be in your name or in the children's name, and an IRA is an individual account, not a joint account, so it would not be in both your names.