Every parent wants the best for their kids, and as a financial planner that leads to a lot of my clients asking about the best way to start saving for college.

My first piece of advice is always to make sure you’ve built a solid financial foundation for yourself first, including getting your retirement savings on track. It’s the whole “oxygen mask on the plane” philosophy. You have to stabilize yourself before you can truly help your kids.

But if you’ve already done that and you’re able to put some extra money away toward saving for college, what’s the best way to get started?

Three types of accounts stand above the rest when it comes to college savings. Let’s review the pros and cons of each one.

1. Roth IRA

A Roth IRA is technically a retirement account, but it can serve as an excellent college savings account as well.

You’re allowed to contribute up to $6,000 per year, per person, which means that a couple can contribute up to $12,000 per year. There’s no tax deduction for those contributions, but the money grows tax-free and can be withdrawn tax-free once you reach age 59.5. That’s what makes it such a valuable retirement savings account.

Two special rules allow it to be used effectively for college expenses as well:

1. You can always withdraw up to the amount you’ve contributed at any time and for any reason without taxes or penalties.
2. You’ll have to pay taxes on the earnings (any amount over what you’ve contributed) you withdraw from your Roth IRA before age 59.5, but you won’t have to pay the 10% penalty that typically comes with early withdrawals if the money is used for qualified higher education expenses.

The other big benefit of a Roth IRA: flexibility. College expenses are hard to predict and if you don’t end up needing all the money in your Roth IRA for college, you can simply keep it in the account, let it keep growing tax-free, and then use it tax-free down the line for retirement.

That flexibility makes Roth IRAs a great place to start your college savings, especially if you’re not already 100% on track for retirement.

2. 529 savings account

If you’re looking for the premier, dedicated college savings account, the 529 savings account is it. Here’s how this means of saving for college works:

• Contributions are not deductible for federal income tax purposes, though some states allow you to deduct contributions for state income tax purposes. The website FinAid.org lists your state’s rules.
• The money grows tax-free while inside the account.
• Money can be withdrawn tax-free for qualified higher education expenses.
• Up to $10,000 per year can be withdrawn tax-free for eligible K-12 expenses according to federal law, though you need to be careful about your state’s rules around those withdrawals.

Those tax benefits make it the most powerful college savings account, if you’re confident that the money will be used for eligible education expenses. Because the major downside is that if the money is withdrawn for any other purpose, the earnings are both taxed and subject to a 10% penalty.

Each state offers its own 529 savings account and some states offer more than one, but you aren’t required to use your home state’s plan. In some cases using your home state’s plan is the only way to claim a state income tax deduction, but if your state doesn’t have that requirement or doesn’t offer a deduction at all, it’s worth shopping around.

3. Brokerage account

While it doesn’t offer any special tax breaks, a regular old brokerage account gives you maximum flexibility. You can invest in just about anything you want and you can withdraw your money at any time and for any reason, including college, without penalty.

For clients who have a lot of money they want to save specifically for college, I often recommend striking a balance between a 529 savings account and a brokerage account. That way they get some of the tax benefits of the 529 plan while also maintaining some flexibility in case their plans change or they simply don’t end up spending as much as they thought they would on college.

It’s also a good option if you have money that you want to invest but you aren’t sure exactly what you’ll want to use it for. A brokerage account allows that money to grow while remaining accessible for whatever needs come up.

Most important step in saving for college: Getting started

While each of the accounts above has its pros and cons, the reality is that they’re all great options. And when you’re just starting out, the account you choose is far less important than simply saving money somewhere.

But if you’re looking to get the most out of your college savings, the following guidelines will help you make the right choice:

• Use a Roth IRA if you’re either not on track for retirement through other means or you’d like to preserve the option of using the money for retirement.
• Use a 529 savings account if you’re confident the money will be used for education expenses and you want to maximize your tax benefits.
• Use a brokerage account to balance things out if you’re concerned about committing too much money to a 529 savings account, or if you’re saving for more general long-term goals. Though the Roth IRA is likely a better first step in either case.

ABOUT THE AUTHOR

Matt Becker, CFP,® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.

Saving for college photo ©Monster Ztudio / Adobe Stock.

Yesterday, I was blogging about using coupons to save money on purchasing your baby products. It is also time for all of us to start saving for the significant future cost of college and find ways to gain additional money for it. As a stay-at-home dad of a 10-month-old, it is hard to figure out a plan for the current day, let alone his future. I recently signed up for a “529 College Savings Plan” which allows me to invest after-tax dollars into an account that will then be tax-free when he is in college. These accounts may not be the right choice for everyone because you can’t control the market and its volatility, and you can only pick from a very limited choice of stock funds. Consequently, once you sign up for a 529 account, you can also establish a UPROMISE Account.

Upromise is a FREE way to earn additional money for your kid’s college fund. Basically, you sign up for an account which is relatively simple, and then you link your account to all of your credit cards (you can link them to your parents’ cards as well). Upromise has agreements with many online stores. If you shop through a link on the Upromise page, you will be credited back 1-8% and even up to 25% in a few limited cases of your purchase price. Many online stores participate in this program and if you shop online a lot, you can earn quite a bit here. Restaurants, some grocery stores, gas stations, Kodak Gallery, and some local stores give rebates, such as dry cleaners, florists or mechanics, if you buy the product using a credit card registered with Upromise. Sometimes large chains, such as Bed, Bath and Beyond offer discounts as well. You need to keep checking their site to see which new vendors have been added or changed their rebate terms.

I have been using Upromise for about two months now and have earned an additional $25 so far for my son’s college fund. I agree it does not sound like a lot. However, I did not have to do anything different to earn it, and at this pace, I will earn approximately $150 in one year, and have $2,700 by the time my son is 18! Not bad at all. Check out Upromise to see if the program might work for you to save additional money for your child’s college fund.