Where Should I Invest My Kids' College Cash?
Question of the month.
(MONEY Magazine) - QUESTION: I have a six-year-old son and a three-year-old son. Which is a better place to invest a little college money, the EE bond or the I bond?
ANSWER: The answer is C, none of the above.
With at least 12 years until your sons head to college, you can take more risk and aim for better returns with stocks. But it's understandable that you'd ask about savings bonds.
Series EE and I bonds offer tax benefits for college savers. With both you owe no taxes on the interest until you sell the bond, and even then you don't pay state or local income taxes. If you use the bond to pay for college, it's entirely tax-free as long as your income is low enough the year you cash it in. But those tax breaks don't make up for the bonds' low returns.
New Series EE bonds pay a fixed rate, currently 3.2%. I bonds have a variable rate tied to inflation. A state 529 plan is a better choice since it allows you to invest in a mix of stocks and bonds. Earnings grow tax deferred, and withdrawals are free of federal taxes until at least 2010. To learn more, go to savingforcollege.com.