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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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.
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