Expert: Gina Boykin - 4/26/2009

Question
Hi Gina - thanks for taking the time to answer my question.  My 10 year old daughter was awarded 129,000 as a result of a dog bite injury - less legal fees, approx. $89,000 Yikes! What would acrue the most interest until she reached 18.  The majority will be used for her college education.  Was considering asking the court to allow me to use some for her high school education at a private H.S. approximately $10,000 a year in tuition.  I just don't know the best thing to do.  Please advise me - I can't tell you how much I appreciate it.  THANK YOU!

Answer
Whatever amount you plan to use for college can be placed in a 529 plan.  This type of account allows the money to grow tax-free, but only if the money is used for higher education.  There are many 529 plans to chose from because each plan must be sponsored by a state.  If your state offers one, you may get additional advantages, such as a state income tax credit for your yearly contributions. (If this is the case, you may want to split the money and invest partial amounts over the next few years so you can take advantage of the credits.)  One really good guide/recommendation list is at Clark Howard's website.  Here's the link to the exact list.  He shows the best for each state, and then the overall best in the country.  This link also provides additional info on 529 plans in general.

http://clarkhoward.com/liveweb/shownotes/category/7/76/215/381/

Now, for the money that won't be used for college.  Any money you are planning to use for private high schools or anything else in the next few years should really just be placed in savings (or money market account) or in certificates of deposits (which range from 3-mo to 5-yr, which would be around the time of high school).  To look for the best savings/MMA and CD rates, you can go to bankrate.com

Investing this money, that will be used in a few years, could provide a better return, but you could also lose money and be forced to cash out when your account is down.  This is why money that will be used in a shorter time frame is better off in accounts that provide guaranteed earnings.

If you think that there is a good chance that some of the money will last beyond college years (which I think should be a pretty good goal to have for this money), another option you have is to put some in savings/CD's for now, and when your daughter is old enough to work, some of the money can be place in a Roth IRA.  A Roth IRA is a retirement account, and I know this will be the last thing on her mind as a teenager, but here are some things to consider:

1.  Money grows tax-free.  
2.  You can take out your deposits (but not your earnings) after 5 years with no penalty.  

Let's say that she puts $10,000 over her teenage and college years into a Roth.  When she turns 25 she wants to buy a house and the account has grown to $18,000. She can withdraw up to $10K and use it for her downpayment on her house with no taxes and no penalties.  The remaining $8K will continue to grow and she has a great start toward retirement.
Note: You can only put money in a Roth from EARNED income, which is why you can't put money in a Roth for her now.  However, if she makes any money later, even from babysitting or summer jobs, she is eligible for a Roth.

Both 529 plans and Roth IRA's are just account types, which means you still have to decide what to invest in within these accounts.  Most 529 plans offer "age-based" options, which means they have the majority of the money in aggressive growth stocks when the child is young, and it becomes increasingly conservative as the child gets closer to college age.  For Roth IRA's, the possibilities are endless - individual stocks and bonds, mutual funds, ETF's, etc.