that there are so many 529 options available, should you switch your college-savings accounts such as custodial plans to a
new 529 plan so qualified withdrawals can be made tax-free?
depends, says Joseph Hurley, a Bankrate adviser and founder of Savingforcollege.com (a Bankrate company), a Web site on financing a child's college education.
you're in a 15-percent tax bracket or lower, you may actually be better off in a taxable fund," Hurley says.
because 529 plans charge fees that other accounts don't. And if you're in a low bracket, tax-free withdrawal is less of an
should compare the extra costs in the 529 plan to the tax benefits it provides, and if the tax benefits don't outweigh the
extra costs, the 529 is probably not something you want to use," Hurley says.
more, if your custodial account is invested in a stock index fund, any profits you withdraw will be taxed as a capital gain.
The capital-gains tax rate is typically lower than the income tax rate you'd face from an interest-producing account such
as a bond fund.
you're in a tax-efficient, equity-index fund, and you don't have to pay the extra costs of the 529 plan, you might be better
off in the custodial account," Hurley says.
custodial account is a savings plan set up for a minor who takes ownership upon reaching adult age -- age 18 or 21, depending
on the individual plan's rules. You can withdraw funds anytime as long as they are for the designated child's benefit. When
the child reaches adult age, he or she can withdraw funds for any purpose.
custodial account gives you more flexibility than a 529 to withdraw money for purposes other than higher-education costs.
Hurley says 529 withdrawals must be for qualified education expenses only. If not, they incur a 10-percent penalty plus taxes.
taxes on unqualified 529 withdrawals may be assessed at the child's rate, not the parents', says Julie Murphy Casserly of
JMC Wealth Management in Chicago and author of "The Emotion Behind Money: Building Wealth from the Inside Out."
the child's tax bracket is lower than the parents', so even with the 10-percent penalty, it's not necessarily so bad to use
529 money for other things," she says.
suppose you have two or more children. Is it really necessary to hold a separate 529 for each child? That is, can't you have
just one 529 plan and when the time comes, dole out a portion for one child, then change the beneficiary and dole out the
rest for the other child, thus saving on 529 fees?
I recommend separate accounts for each child because they are different ages," says Greg Merlino, president of Ameriway Financial
Services, a financial advisory firm in Voorhees, N.J. "The younger child would have a more aggressive portfolio because he
or she has a longer time before college starts, and you would be more conservative for the older child who is nearer college
Correction: In the story when not to use a 529 plan, it was incorrectly stated that unqualified 529 plan withdrawals are taxed at the child's rate.
In fact, unqualified 529 plan withdrawals are assessed at the recipient's federal income-tax rate (plus a
10% penalty), whether that recipient is the parent or the child.