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Question for the Money Doctors

Question submitted on Oct 12, 2012.

Question

I am a college student interested in investing. What is the easiest, most secure way to invest without paying taxes. I have about $400 dollars that I would like to invest, would like to see it grow so that I could potentially use it to pay student loans (>$8000). The stock market scares and confuses me.

Answer

Growing $400 into $8,000, while not impossible, is typically unrealistic in a short period of time, especially if you are uncomfortable owning stocks.  Being a college student, let's assume you are in a low or "no" tax bracket.  You could invest the $400 into a Roth IRA to begin saving for retirement.  While there is no tax deduction on the contribution, future withdrawals including earnings are tax free.

Another option, if you are certain that you will use your money to pay for college expense, would be to consider a 529 savings plan.  These college savings accounts allow your money to grow tax-free, provided you use the money for qualified education expenses.  A 529 plan cannot be used to pay for student loans.  You must use the funds to pay for expenses as they are incurred.  I would consider this depending on how many years of schooling you anticipate and what future contributions you might be able to deposit to the account.

No matter what type of investment account you choose, the goal to achieve $8000 at the end of your college career is lofty.  You will need to make regular deposits to the account in addition to your initial $400 investment if you want to reach that goal within a shorter period of time.


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