Expert: Gina Boykin - 2/9/2009

Question
Hi Ms. Boykin,

I have a 2-year-old son and my goal is to save up and invest the money for my son when he goes to college, 16 years later.
I want to start with $5000 and invest $100 a month. What would be the best way, without risk, to maximize the outcome of the investment in 16 years from now.

Thanks in advance.
Your help will be greatly appreciated.

Chip Hatd.


Answer
If you want absolutely no risk whatsoever, you are really only left with savings, certificates of deposits, and treasury bonds.  For the best rate on savings and CDs, you can check out bankrate.com.  For government bonds, you can buy these directly through the government's webiste at treasurydirect.gov or buy them through a bank.

The next step up would be to invest in a money market mutual fund. These funds invest in very safe financial instruments (just like CDs and government bonds) so they have very low risk.  You can invest in this type of fund through a 529 plan.  A 529 plan is just a type of account, so there are many different investment options within this plan.  This type of account is specifically designed for people who want to save money for their children to go to college.  Money in this account grows tax-free and can be spent later on tuition and other college related expenses tax-free.  This can be a great advantage to any type of savings you do outside of this plan.  

If you think that the money will not be used for college, though, this is not the best idea, because there are taxes if the money is not used for school.  If you're planning on college, the 529 plan is the best thing out there.

There are several to chose from, so you'll have to do some research.  Sometimes you can get a tax credit now for the money you invest in a 529 plan in your own state.  One good site to visit is www.clarkhoward.com.  He has a 529 guide on his website (http://clarkhoward.com/liveweb/shownotes/category/7/76/215/381/) that shows the best plan for each state.

Another site you can visit is www.independent529plan.org.