Saving for your children's college education is one of the most important financial tasks you will ever undertake. Luckily, you have plenty of savings options, most of them with tax advantages designed to encourage you to invest in your children's future. Consider a Roth IRA:
The Roth allows you to take out your contributions at any time, tax- and penalty-free, so you could tap that money for college expenses.
Here’s how it works: A husband and wife can each contribute a certain amount—in 2010, up to $5,000 annually ($6,000 if you’re 50 or older). Say you and your spouse start out on this path with a newborn. You would contribute $180,000 over 18 years. That sum could then be tapped for college bills or left to continue growing for retirement. The earnings on those contributions (another $225,000 in this example assuming the accounts grow at 8% per year) could be withdrawn penalty-free if you use them to pay college bills (but tax would still be due if you are under age 59½ at the time of the withdrawal). Or earnings could continue to grow inside the account and be withdrawn tax-free when you retire.
Note that there are income limits for contributing to Roths. For instance, in 2010, the ability to contribute begins to phase out at modified adjusted gross incomes of $167,000 for married couples filing jointly and disappears entirely at $177,000. The income phaseout range for singles is $105,000 to $120,000.
Retirement assets are not included in the federal financial aid formula.