Which College Fund to Tap First

published 10 August 2006

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.

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Ask Kim Paying For College

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.