Where Should My Daughter Put Her $15,000 Until She Pays for College?

Working as a teenager still is a right of passage for many Americans.

If you plan to attend college, it can be a major boost. But it can also unexpectedly hurt you if you don’t understand the system.

Have you earned money as a teenager that you plan to spend toward your college education? Here’s how to invest college money.

Where Should My Daughter Invest Her College Money Until She Graduates High School?

My daughter has earned money for college. Where should she invest the money before she needs to pay?

That’s what a Clark Howard podcast listener recently asked.

Asked Sharon in Missouri: “My 17-year-old daughter has saved over $15,000 from working the last two years. She plans on using this money to fund her college education. She will not need to access the money until August 2025.

“She currently has it in credit union savings but she read that she can earn interest if she invests it somewhere else. Where do you recommend she invest her money for the biggest payout?”

Clark didn’t hesitate to answer.

“Your daughter needs to run, not walk, to open a Roth IRA with one of my favorite children Fidelity, Schwab or Vanguard,” Clark says.

“Because left in a savings account under the rules required for qualifying for financial aid, she’s expected to spend all that money on her education right away. The formula punishes, is cruel, to teenagers who save money in savings accounts.”

Clark may be “the man from Roth.” But there are plenty of good reasons why he’s making this recommendation.

Sharon could encourage her daughter to move the money from the credit union to one of the best high-yield savings accounts. She’d be able to earn 5% interest. But as Clark mentioned, the formula that determines financial aid will punish Sharon’s daughter for holding a stack of cash in savings.

“On the other hand, if she migrates that money into a Roth IRA, then it’s considered not to be a spendable asset for college and does not discriminate against her at most any college,” Clark says.

Clark’s Advice on Investing for College

Sharon’s daughter made $15,000 in the last two years. She can no longer make Roth IRA contributions for 2022. But she has until April 15, 2024, to make contributions for the 2023 calendar year.

The 2023 contribution limits were $6,500. So assuming she earned at least $6,500 in ’23, she’ll be able to do that.

Additionally, Clark is assuming that the 17-year-old will continue earning money in ’24. If that’s a sure thing, Clark says she should make an additional contribution for 2024. The contribution limit for this year is $7,000, which she can put in now if she will earn that much this year.

That would get $13,500 of the $15,000 into a Roth IRA.

Clark prefers that you have a 10-year timeline if you’re going to invest. He’s willing to accept as little as five years. Less than five years? He discourages you from investing in the stock market.

So he wants Sharon’s daughter to open a Roth IRA with Fidelity, Schwab or Vanguard. And then put those dollars into a money market fund. She should be able to earn roughly 5% right now, similar to what she’d get in one of the best high-yield savings accounts.

That will protect the money from counting against her when it’s time to calculate federal financial aid.

How To Withdraw the Money When You Need It

“Now here’s the cool part. When you put money in a Roth IRA, you can withdraw your contributions at any time tax- and penalty-free,” Clark says.

“Leave it in for as long as she can before she pulls it out for college. So it has more tax-free growth.

“The only money that really needs to stay in there at full safe harbor is whatever earnings that money would have over the years. And that would give her a little start on building money for retirement, well, 50 years down the road.”

Final Thoughts

It’s outstanding when a child works before college and can build up some savings. Clark takes pride in the fact that he worked from a young age. And he required that his teenagers get a job in high school as well.

If you’re in that situation, consider stashing the earned money in a Roth IRA. Even if you don’t have long until you need to spend the money for college.

Just avoid investing in the stock market if you’re just a few years away from spending the money on college. Put the money in a money market fund instead. And then withdraw only your contributions when you’re ready to pay.