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Where they are now: Mary and Steve, ages 44 and 45, want to
put their kids through college. Lisa, age 10, and Jeff, age 14, are bright kids
but probably won't qualify for scholarships.
Both Mary and Steve have great jobs; Steve
is a marketing executive and expects a
promotion soon, and Mary is a computer
programmer. They both invest 8% of their
salaries in 401(k) plans and receive a match
up to 6%. They also invest $400 a month in
a money market account for their children's
education. They've done a great job of
scaling back expenses so they can put
aside as much as possible. But with a late
start, this still doesn't seem like enough.
What they might do differently:Mary and Steve have a good start at investing, but assuming their income tax rate is unaffected, they may want to consider reducing their 401(k) to 6%, still taking full advantage of the employer matching benefit. They could consider investing the additional 2% of their salaries into a Roth IRA. Why? Like a 401(k), a Roth IRA also gives them powerful tax benefits because a Roth IRA grows tax-free. And a Roth IRA gives them greater flexibility to withdraw their contributions for college expenses without repayment, should they ever need it, whereas a 401(k) requires them to take a loan and repay it over time. A Roth IRA also gives them a wider array of investment options from which to choose.It's also great that Mary and Steve are investing for their children's education, but they could receive a great benefit by investing their $400 a month in a 529 college savings plan. Unlike a taxable money market account, a 529 plan allows their money to grow without paying taxes on the earnings annually. And it's even federal tax-free when they withdraw the money, as long as it's for eligible expenses. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Wells Fargo Advantage Money Market Funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a money market fund.
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