How can a 529 plan help me save for my child's college education?
You get to put money away with special tax incentives (ie - no or less taxes to pay)  They are state sponsored and therefore pretty reliable, but some states are better than others. Like with many of these tax incentive type accounts (FSA, Dependent Care Spending Accounts) they are use it or lose it.  (In a 529, use it or transfer it).  So the money put away is a sunk cost towards education and cannot be repurposed for something else should your kid not want to attend school. http://money.howstuffworks.com/personal-finance/financial-planning/529.htm "If you're ready to start a 529 account, it makes a big difference which state you choose (some states have excessive fees).  It doesn't have to be your own state, but some states give you tax incentives to stay in-state.  What you need to do is check out Clark Howard's 529 Guide and check to see if your state is in the ""good"" list.  If not, then pick out a good state."
You can take the money back out of a 529 plan if you end up not having enough educational expenses to use it on. The penalty is 10% of the earnings (you don't pay a penalty on the principal). You can also open a 529 in any state, not just the one where you reside. The minimums and fund selection for each state can vary widely, so it makes sense to look around and see if there's a state with a fund selection you like. If I were in your shoes (I would be extremely happy), here's what I would do: Get on a detailed budget, if you aren't doing one already. (I read the comments and you seemed unsure about certain things.)  Once you know where your money is going, you can do a much better job of saving it. Retirement Savings: Contribute up to the employer match on the 401(k)s, if it's greater than the 5% you are already contributing. Open a Roth IRA account for each of you and make the max contribution (around $5k each).  I would also suggest finding a financial adviser (w/ the heart of a teacher) to recommend/direct your mutual fund investing in those Roth IRAs and in your regular mutual fund investments. Emergency Fund With the $85k savings, take it down to a six month emergency fund.  To calculate your emergency fund, look at what your necessary expenses are for a month, then multiply it by six.  You could place that six month emergency fund in ING Direct as littleadv suggested.  That's where we have our emergency funds and long term savings.  This is a bare-minimum type budget, and is based on something like losing your job - in which case, you don't need to go to starbucks 5 times a week (I don't know if you do or not, but that is an easy example for me to use).  You should have something left over, unless your basic expenses are above $7083/mo. Non-retirement Investing: Whatever is left over from the $85k, start investing with it. (I suggest you look into mutual funds) it.  Some may say buy stocks, but individual stocks are very risky and you could lose your shirt if you don't know what you're doing.  Mutual funds typically are comprised of many stocks, and you earn based on their collective performance. You have done very well, and I'm very excited for you. Child's College Savings: If you guys decide to expand your family with a child, you'll want to fund what's typically called a 529 plan to fund his or her college education.  The money grows tax free and is only taxed when used for non-education expenses.  You would fund this for the max contribution each year as well (currently $2k; but that could change depending on how the Bush Tax cuts are handled at the end of this year). Other resources to check out: The Total Money Makeover by Dave Ramsey and the Dave Ramsey Show podcast. If these are children that may be employed, in a few years, it may well be worth walking them through some basics of the deductions around employment, some basic taxes, uses of banks, and give them enough of a basis in how the economy of the world works.  For example, if you get a job and get paid $10/hour, that may sound good but how much do various things eat at that so your take-home pay may be much lower?  While this does presume that the kids will get jobs somewhere along the way and have to deal with this, it is worth making this part of the education system on some level rather than shocking them otherwise. Rather than focusing on calculations, I'd be more tempted to consider various scenarios like how do you use a bank, what makes insurance worth having(Life, health, car, and any others may be worth teaching on some level), and how does the government and taxes fit into things. While I may be swinging more for the practical, it is worth considering if these kids will be away in college or university in a few years, how will they handle being away from the parents that may supply the money to meet all the financial needs? "Place your savings into safe interest-bearing accounts. Take out the loans.  Keep constant track of your net worth. Having 100,000$ and 80,000$ in interest free debt is better than having 20,000$.  You can always convert money + debt into less money and less debt, but you cannot always convert less money and less debt into more money and more debt. Now, there are risks; that is why you want an interest-bearing account to place your savings in to offset the debt.  This minimizes the risk.  It also reduces the return. It is arguable that you should be at your most financially risky at a young age.  I'd argue that your future earnings are your by far largest asset at this point, and as a high school student going into college those future earnings have extremely high variability. Your financial situation is extremely unpredictable; being conservative about your high-leverage student-loan + education investments is probably justified.  The fact you can manage arbitrage here means you should; and if you are careful, you can eliminate risk and get almost risk-free profit from the maneuver. If your money is in less than perfectly safe accounts, you are now doing leveraged investing and magnifying the risk and return of said investments. If your money must be spent on college or you'll be financially punished, then you may want to consider pulling it out before the last possible legal point just in case something goes wrong. Apparently 529 plans may not treat ""paying off student loans"" as a valid way to spend the money.  You may need to talk to a lawyer or accountant about the legality of using these plans to pay off student loans, and the tax/penalties involved." I was in a similar situation with my now 6 year old.  So I'll share what I chose.  Like you, I was already funding a 529. So I opened a custodial brokerage account with Fidelity and chose to invest in very low expense index fund ETFs which are sponsored by Fidelity, so there are no commissions.  The index funds have a low turnover as well, so they tend to be minimal on capital gains. As mentioned in the other answer, CDs aren't paying anything right now.  And given your long time to grow, investing in the stock market is a decent bet. However, I would steer clear of any insurance products.  They tend to be heavy on fees and low on returns.  Insurance is for insuring something not for investing. Yes, it's considered the students asset, regardless of the custodian aspect.  I don't know how you'd propose to put it in a retirement account, even with the earned income to facilitate this, the limit is $5500/yr.  The larger issue is parental income. That and parental assets. Tough to game that part of the system to get aid. In the end, one should look to scholarships, both merit and non merit based to maximize college support. When I think of the loopholes that the richest of the rich exploit to get out of paying taxes, this article does seem kind of pointless.  Why attack the 529 plan?  It would be better to attack the expense of the education and the need for the plan in the first place.  Upper middle classers shouldn't have to give a second thought to how much it will cost to send their kids to university, unless it is a private school.  30 years ago it cost 350 bucks for a semester.  Now it is 10k or more.  We all see that this is ridiculous, but it goes on and on.  Rents have doubled or even tripled in the last 7 years and this is normal? I'm not a 'rule of thumb' guy, but here, I'd suggest that if you can set aside 10% of your income each year for college, that would be great. That turns out to be $900/mo.  In 15 years, if you saw an 8% CAGR, you'd have $311K which happens to be in your range of expenses. And you'd still have time to go as the baby won't graduate for 22(?) years. (Yup, 10% is a good rule of thumb for your income and 3 kids) Now, on the other hand, I'd research what grants you'd be able to get if you came up short. If instead of saving a dime, you funded your own retirement and the spouse's IRA if she's not working, and time the mortgage to pay it off in 15 years from now, the lack of liquid funds actually runs in your favor. But, I'm not an expect on this, just second guessing my own fully funded college account for my daughter. "There are entire books devoted to this topic... :) I'd suggest focusing on a % of income that you can set aside for each child and start doing that instead of looking at a specific dollar target. I would look at a 529 plan to get the state tax benefit for growth. Also, be careful to counter the ""advice"" given by admissions folks, who encourage high school kids to ""choose the college that will make you happy"" and expose them to as many pictures of lovely, leafy private campuses as possible. The lawns at the private school are nice, but state colleges offer a great education at a relative bargain. Try to teach your kids about money so they understand the downsides of the loans that schools throw at you. I went to a state school, had very supportive parents and worked throughout. I came out with $750 of debt (on a 0% credit card for a laptop replacement). I have a friend who went to a similar, private school who came from a similar background and who is now in a similar place career-wise. Except he has a $500/mo monthly tribute to Sallie Mae. My parents started working on me when I was about 12, and it worked!" "There is no simple answer to your question.  It depends on many things, perhaps most notably what college your daughter ends up going to and what kind of aid you hope to receive. Your daughter will probably fill out the FAFSA as part of her financial aid application.  Here is one discussion of what parental assets ""count"" towards the Expected Family Contribution on the FAFSA.  You can find many similar pages by googling.  Retirement accounts and primary residence are notable categories that do not count.  So, if you were looking to reduce your ""apparent"" assets for aid purposes, dumping money into your mortgage or retirement account is a possibility. However, you should be cautious when doing this type of gaming, because it's not always clear exactly how it will affect financial aid.  For one thing, ""financial aid"" includes both grants and loans.  Everyone wants grants, but sometimes increasing your ""eligibility"" may just make you (or your daughter) eligible for larger loans, which may not be so great. Also, each college has its own system for allocating financial aid.  Individual schools may ask for more detailed information (such as the CSS Profile).  So strategies for minimizing your apparent assets that work for one school may not work for others.  Some elite schools with large endowments have generous aid policies that allow even families with sizable incomes to pay little or nothing (e.g., Stanford waives tuition for most families with incomes under $125,000). You should probably research the financial aid policies of schools your daughter is interested in.  It can be helpful to talk to financial aid advisors at colleges, as well as high school counselors, not to mention general financial advisors if you really want to start getting technical about what assets to move around.  Needless to say, it all begins with talking with your daughter about her thoughts on where to go." For a parent deciding on contributing to a 529 plan the first consideration is the plan run by the state government that will trigger a state income tax deduction. You do have to at least look at the annual fees for the program before jumping into the state program, but for many people the state program offers the best deal because of the state tax deduction. Unfortunately for you California does not offer a state tax deduction for 529 plan contributions. Which means that you can pick another states program if the fees are more reasonable or if the investing options are better. You can even select a nationwide plan unaffiliated with a state. Scholarshare is run by TIAA-CREF. TIAA-CREF is a large company that runs pension and 403(b) funds for many state and local governments. Many teacher unions use them.  They are legitimately authorized by the state of California: The ScholarShare Investment Board sets investment policies and   oversees all activities of ScholarShare, the state’s 529 college   investment plan. The program enables Californians to save for college   by putting money in tax-advantaged investments. After-tax   contributions allow earnings to grow tax-deferred, and disbursements,   when used for tuition and other qualified expenses, are federal and   state tax-free. The ScholarShare Plan is managed by TIAA-CREF Tuition   Financing, Inc. The ScholarShare Investment Board also oversees the Governor’s   Scholarship Programs and California Memorial Scholarship Program. note: before picking a plan from another state make sure that they allow outside contributions. If you have kids, there are also 529 funds to consider. They aren't pre-tax, but do have tax advantages. If your employer doesn't have a 401k, chances are they don't offer Health Savings Accounts, but that is another thing to look at. "I will answer the question from the back: who can NOT afford luxury cars? Those whose parents paid for their college education, cannot afford luxury cars, but buy them anyway. Why? I have what may seem a rather shocking proposition related to the point of not saving for kids' college: parents do NOT owe children a college education. Why should they? Did your parents fund your college? Or did you get it through a mix of Pell grants, loans, and work? If they did, then you owe them $ back for it, adjusted for inflation. If they did not, well then why do you feel your children deserve more than you deserved when you were a child? You do not owe your children a college education. They owe it to themselves. Gifts do not set one up for success, they set one up for dependence.   I will add one more hypothesis: financial discipline is best learned through one's own experiences. When an 18+ year old adult gets a very large amount of money as a gift every year for several years (in the form of paid tuition), does that teach them frugality and responsibility? My proposition is that those who get a free ride on their parents' backs are not well served in terms of becoming disciplined budgeters. They become the subjects of the question in this post: those why buy cars and houses they cannot afford, and pay for vacations with credit cards. We reap what we sow as a society.  Of course, college is only one case in point, but a very illustrative one. The bigger point is that financial discipline can only be developed when there are opportunities to develop it. Such opportunities arise under one important condition: financial independence.  What does buying children cars for their high-school graduation, buying them 4 years of college tuition, and buying them who knows what else (study abroad trips, airfare, apartment leases, textbooks, etc. etc.) teach? Does it teach independence or dependence?  It can certainly (at least that's what you hope for) teach them to appreciate when others do super nice things for them. But does free money instill financial responsibility?  Try to ask kids whose parents paid for their college WHY they did it. ""Because my parents want me to succeed"" is probably the best you can hope for. Now ask them, But do your parents OWE you a college education? ""Why yes, I guess they do."" Why? ""Well, I guess because they told me they do. They said they owe it to me to set me up for success in life."" Now think about this: Do people who become financially successful achieve that success because someone owed something to them? Or because they recognized that nobody owes them anything, and took it upon themselves to create that success for themselves? These are not very comfortable topics to consider, especially for those of you who have either already sunk many tens of thousands of dollars into your childrens' college education. Or for those who have been living very frugally and mindfully for the past 10-15 years driven by the goal of doing so. But I want to open this can of worms because I believe fundamentally it may be creating more problems than it is solving. I am sure there are some historical and cultural explanations for the ASSUMPTION that has at some point formed in the American society that parents owe their children a college education.  But as with most social conventions, it is merely an idea -- a shared belief. It has become so ingrained in conversations at work parties and family reunions that it seems that many of those who are ardent advocates of the idea of paying for their childrens' education no longer even understand why they feel that way. They simply go with the flow of social expectations, unwilling or unable to question either the premises behind these expectations, or the long-term consequences and results of such expectations.  With this comment I want to point to the connection between the free financial gifts that parents give to their (adult!) children, and the level of financial discipline of these young adults, their spending habits, sense of entitlement, and sense of responsibility over their financial decisions. The statistics of the U.S. savings rate, average credit card debt, foreclosures, and bankruptcy indeed tell a troubling story.  My point is that these trends don't just happen because of lots of TV advertising and the proverbial Jones's. These trends happen because of a lack of financial education, discipline, and experience with balancing one's own checkbook. Perhaps we need to think more deeply about the consequences of our socially motivated decisions as parents, and what is really in our children's best interests -- not while they are in college, but while they live the rest of their lives after college. Finally, to all the 18+ y.o. adult 'children' who are reeling from the traumatic experience of not having their parents pay for their college (while some of their friends parents TOTALLY did!), I have this perspective to offer:  Like you are now, your parents are adults. Their money is theirs to spend, because it was theirs to earn. You are under no obligation to pay for your parents' retirement (not that you were going to). Similarly your parents have no obligation to pay for your college. They can spend their money on absolutely whatever they want: be it a likeside cottage, vacations, a Corvette, or slots in the casino. How they spend their money is their concern only, and has nothing to do with your adult needs (such as college education).  If your parents mismanage their finances and go bankrupt, it is their obligation to get themselves back in the black -- not yours. If you have the means and may be so inclined, you may help them; if you do not or are not, fair enough. Regardless of what you do, they will still love you as their child no less.  Similarly, if your parents have the means and are so inclined, they may help you; if they do not or are not, fair enough. Regardless of what they do, you are to love them as your parents no less.  Your task as an adult is to focus on how you will meet your own financial needs, not to dwell on which of your needs were not met by people whose finances should well be completely separate from yours at this point in life. For an adult, to harbor an expectation of receiving something of value for free is misguided: it betrays unjustified, illusory entitlement. It is the expectation of someone who is clueless as to the value of money measured by the effort and time needed to earn it. When adults want to acquire stuff or services, they have to pay for these things with their own money. That's how adults live. When adults want to get a massage or take a ride in a cab, are they traumatized by their parents' unfulfilled obligation to pay for these services? No -- they realize that it's their own responsibility to take care of these needs. They either need to earn the money to pay for these things, or buy them on credit and pay off the debt later.  Education is a type of service, just like a massage or a cab ride. It is a service that you decide you need to get, in order to do xyz (become smarter, get a better paying job, join a profession, etc.). Therefore as with any other service, the primary responsibility for paying for this service is yours.  You have 3 options (or their combination): work now so that you can earn the money to pay for this service later; work part-time while you are receiving this service; acquire the service on credit and work later to pay it off. That's it. This is called the real world. The better you can deal with it, the more successful you will become in it. Good luck!" Saving for college you have a couple of options.  529 plans are probably the best bet for most people wanting to save for their kids college education. You can put a lot of money away ~$300k and you may get a state tax deduction. The downside is if you're kid doesn't go to college you may end up eating the 10% penalty. State specific prepaid tuition plans. The upside is you know roughly the return you are going to get on your money. The downside is your kid has to go to a state school in the state you prepaid or there are likely withdrawal penalties. For the most part these really aren't that great of a deal any more.  ESAs are also an option but they only allow you to contribute $2k/year, but you have more investment options than with the 529 plans. Traditional and ROTH IRA accounts can also be used to pay for higher education. I wouldn't recommend this route in general but if you maxed out your 401k and weren't using your IRA contribution limits you could put extra money here and get more or really different flexibility than you can with a 529 account. I doubt IRA's will ever be asked for on a FAFSA which might be helpful. Another option is to save the money in a regular brokerage account. You would have more flexibility, but lower returns after taxes. One advantage to this route is if you think your kid might be borderline for financial aid a year or two before he starts college you could move this money into another investment that doesn't matter for financial aid purposes. A few words of caution, make sure you save for retirement before saving for your kids college. He can always get loans to pay for school but no one is going to give you a loan to pay for your retirement. Also be cautious with the amount of money you give your adult child, studies have shown that the more money that parents give their adult children the less successful they are compared to their peers. "Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts in the United States are accounts that belong to your child, but you can deposit money into.  When the child attains his/her majority, the money becomes theirs to spend however they wish.  Prior to attaining their majority, a custodian must sign off on withdrawals.  Now, they are not foolproof; legally, you can withdraw money if it is spent on the child's behalf, so that can be gamed.  What you can do to protect against that is to make another person the custodian (or, perhaps make them joint custodians with yourself, requiring both signatures for withdrawals). UTMA/UGMA accounts do not have to be bank savings accounts; for example, both of my children have accounts at Vanguard which are effectively their college savings accounts.  They're invested in various ETFs and similar kinds of investments; you're welcome to choose from a wide variety of options depending on risk tolerance.  Typically these accounts have relatively small fees, particularly if you have a reasonable minimum balance (I think USD$10k is a common minimum for avoiding larger fees). If you are looking for something even more secure than a UGMA or UTMA account, you can set up a trust.  These have several major differences over the UGMA/UTMA accounts: Some of course consider the second point an advantage, some a disadvantage - we (and Grandma) prefer to let our children make their own choices re: college, while others may not prefer that. Also worth noting as a difference - and concern to think about - in these two.  A UGMA or UTMA account that generates income may have taxable events - interest or dividend income.  If that's over a relatively low threshhold, about $1050 this year, those earnings will be taxed (on the child's own tax return).  If it's over $2100 (this year), those earnings will be taxed at the parents' tax rate (""kiddie tax""). Trusts are slightly different; trusts themselves are taxed, and have their own tax returns.  If you do set one of those up, the lawyer who helps you do so should inform you of the tax implications and either hook you up with an accountant or point you to resources to handle the taxes yourself."