Use a Roth to Save for College?

I am almost 26 years old, and my wife and I are planning to have a baby sometime in the near future. I believe that a Roth IRA may be my best option for college savings because I can withdraw my contributions as well as take out the earnings without paying a penalty. I have Vanguard's Target Retirement 2045 fund for my retirement. Could I use Vanguard's 2025 fund for college?

You could, but there are better ways to save for college than tinkering with your own Roth IRA.

First of all, you are correct that a Roth can do double duty as a college savings account. You can withdraw your contributions at any time without paying taxes or a penalty. And you can withdraw your earnings to pay college bills without penalty, although you'll still owe taxes.

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You could certainly divide up the money between two target-retirement or life-cycle mutual funds, each pegged to the date when you'll need the cash. But you're probably better off treating the entire account as your retirement kitty and keeping all of the money in the 2045 fund.

Not only would that be simpler, but it would also allow you to max out your savings in your own retirement account. Contributing $4,000 a year to your Roth IRA would give you at least $72,000 when your child is ready for college.

If you want to put money aside for college, you'll get more tax breaks with a Coverdell education savings account or a state-sponsored 529 plan. With a Coverdell, your annual contribution is limited to $2,000, but you can invest in any stock or mutual fund -- including the 2025 fund.

As with 529 plans, earnings from a Coverdell are tax-free when used for qualified educational expenses. And you can use a Coverdell not only for college bills but also to pay private elementary or high school tuition, or to send a child to camp or buy a computer.

You could also open a 529 account and possibly get a state-tax deduction for your contribution, if your state offers a tax break. If not, choose any state plan with low fees and an attractive lineup of mutual funds.

Kiplinger's likes College Savings Iowa. It offers 13 investments from Vanguard, including a portfolio that becomes more conservative as your child gets closer to college -- just like a target-retirement fund. Use our tool to find other top-notch 529 plans.

Janet Bodnar is editor-at-large of Kiplinger's Personal Finance, a position she assumed after retiring as editor of the magazine after eight years at the helm. She is a nationally recognized expert on the subjects of women and money, children's and family finances, and financial literacy. She is the author of two books, Money Smart Women and Raising Money Smart Kids. As editor-at-large, she writes two popular columns for Kiplinger, "Money Smart Women" and "Living in Retirement." Bodnar is a graduate of St. Bonaventure University and is a member of its Board of Trustees. She received her master's degree from Columbia University, where she was also a Knight-Bagehot Fellow in Business and Economics Journalism.