Which College Savings to Tap First

Don't rush to your 529 account just yet. For school expenses this year, cash out taxable assets before a new law may apply higher tax rates to that money in 2008.

Our son just turned 18 and starts college this fall. We will need to sell stock at some point to pay for tuition -- some is in a custodial account that we've had for a long time and some is in our own accounts. Should we sell the stock now and use it for college bills or spend money from his 529 account? We are stunned that college is actually right around the corner and appreciate any guidance.

Because of a new kiddie-tax law that was passed just a few weeks ago, now is a particularly good time to sell stock in your son's account. In the past, certain investment income from a child's custodial account was taxed at the parents' higher rate until the child turned 14. That age increased to 18 in 2006. This year, the first $850 of a child's investment income is tax-free and the next $850 is taxed at the child's rate (generally 5% for long-term capital gains). Then investment income in excess of $1,700 is taxed at the parents' higher rate (generally 15% for long-term capital gains) if the child is under age 18.

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Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

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.