I have money in several different accounts to pay for my children's college -- most of it is in a 529, but some is in a Coverdell and a custodial account. Which account should I use first to pay the college bills?
Taxes are the deciding factor. First determine whether you qualify for the Hope or lifetime-learning tax credit. If so, don't pay the full tuition bill from a 529 or Coverdell account. College withdrawals from those accounts are already tax-free, and you are not permitted to double up on tax breaks.
You're eligible for the Hope credit if your adjusted gross income in 2006 is less than $110,000 on a joint return (or $55,000 if you're single). In that case, you get a tax credit of up to $1,650 per child in each child's first two years of college. In order to claim the credit, however, you have to pay at least $2,200 of your bill from an account other than a 529 or a Coverdell. So in this situation, it makes sense to tap the custodial account for that part of the bill.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
After your child's first two years of college, you may qualify for the lifetime-learning credit of up to $2,000 per tax return. You have to meet the same income requirements as for the Hope credit, plus you have to pay at least $10,000 in college bills from a source other than a 529 or a Coverdell.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
529 Plans: A Powerful Way to Tackle Rising Education CostsContributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
-
Are Student Loans Being Forgiven or Not?Student Loans The House and Senate voted to repeal President Biden’s student loan forgiveness plan, but does it even matter?
-
Are Scholarships Tax-Free?Education Scholarships are generally tax-free if certain IRS and other requirements are met.
-
Student Loan Forgiveness Blocked For Now Due to Court RulingsBiden's student loan debt forgiveness program is on hold until the U.S. Supreme Court weighs in.
-
529 Plan Contribution Deadlines529 Plans Many states have year-end deadlines for making 529 college savings plan contributions.
-
3 Key Ways You Can Help a Child or Grandchild Pay for Collegecollege Options such as 529 plans, education savings accounts and tax-free gifts can ensure you don’t carry a child’s student loan debt into your golden years.
-
Borrowers Over 50 With Student Loan DebtPaying for College Millions of borrowers 50 and older are struggling to repay loans for themselves and their children, some delaying retirement. There’s a trick, though, to help with repayment.
-
How to Spend $1,000: Find Cheap (or Free) Online Courses to Build Career SkillsSmart Buying There's a huge array of skill-building online courses that can level up your career for under $1,000.
