Q: My wife and I have come into some extra money each month and are wondering what we should do with it. The extra cash comes from a raise at work, and some savings we have found in our monthly budget.

I am already maxing out my 401(k) at work and am wondering if I should pay down my mortgage or open up a Roth IRA or open up a 529 plan for my children’s college education.

What do you think?

A: The dismal returns in the stock market over the last three years have many investors shaking their heads.

It isn’t as if you can plop your spare cash into a savings account and earn any kind of real cash. Savings accounts are paying less than 2 percent. Bonds have also come down in price, as many investors have fled to the safety of Treasuries. In fact, many seniors living on fixed-incomes have seen their 7 percent bonds called and have had to replace them with bonds paying less than half of what they were getting.

So what’s the best place for your spare cash? Start by looking at where you are in relationship to your short-term and long-term financial goals.

If you and your spouse are maxing out both of your retirement options at work, then you should look to other places you can park retirement funds. As it is often said, you can borrow for college, but no one will lend you a dime for your retirement.

Roth IRAs offer you an opportunity to park $3,000 each, for a total of $6,000 per year, in after-tax money (what comes out of your paycheck). If you’re over the age of 50, you can use the catch-up provision and put away $3,500 each. The cash will then grow tax-free forever. After five years, you can use your contributions to pay for college tuition or medical expenses, and there are some benefits when you pass down a Roth IRA to the next generation.

But a Roth IRA, like a 401(k) or any other retirement account is simply a holding tank for cash. Once you’ve deposited the money, you have to find an investment for it, whether it will be a mutual fund, real estate investment trust (REIT), or a bond fund.

Another option for your spare cash is to open up a 529 College Savings Plan. Each state now offers a plan, the cash you deposit grows state and federal tax-free. The funds may generally be used to pay college or graduate school tuition, room, board, books and fees.

The best 529 plans offer a variety of investments, with at least one age-based option. That is, the risk of the investments chosen will be based on how old your child is when you open the 529 plan. So if your child is an infant when you open up the account, the funds will be more aggressively invested. If your child is 16, the funds will be put into a very conservative investment.

If your children don’t go to college, you can roll over the plan to another child or use the funds yourself to go back to school. If you can’t use the cash for schools, and want to cash out of the account, there may be a penalty. For more information about 529 plans, visit SavingForCollege.com, one of the best websites out there.

Your final option is to prepay your mortgage. Right now, prepaying has several benefits. While mortgage rates are at 40-year lows, prepaying your mortgage gives you a guaranteed return on your cash. Every dollar you prepay on any debt (including credit cards or school loans) effectively earns you the interest rate you pay.

So if the interest rate on your loan is 7 percent, prepaying earns you 7 percent. If you deduct the interest you pay on your federal income taxes, you’d earn your net interest rate, which would be a little less. To equal that same return after taxes, you’d have to earn 10 percent on your money or better — difficult to do short-term in the stock market, but easier to achieve historically over 20 to 30 years.

But there is one distinct benefit to paying off your home loan early: It will free up all kinds of cash each month. That’s cash you can use to either pay for your children’s college tuition or supplement your retirement.

And when you sell your home, there’s a tax savings as well: Uncle Sam allows you to take the first $250,000 in profits (up to $500,000 if you’re married) tax free when you sell.

Feb. 28, 2001.