College bills for John Lupton and Kathy Le Comte's three daughters -- 9-year-old twins and a 7-year-old -- are down the road. The couple save $1,000 a year in Coverdell education savings accounts for each girl.
Is that the right choice for tax savings?
Not quite. With both 529 savings plans and Coverdells, you get no federal upfront deduction, but your money grows tax-free and withdrawals for qualified education costs are tax-free too. The Coverdell's $2,000 annual max is now permanent, as are tax-free withdrawals for pre-college school costs.
What the family is missing out on by picking a Coverdell is a local tax break, says CPA Kathleen Lakowski of Northbrook, Ill.
More than half of states offer tax perks for 529s (check finaid.org). In Illinois, you can deduct up to $20,000 a year in contributions.
With the state's 5% income tax and the couple's savings rate, shifting to a 529 will mean a $150 annual bonus. Illinois' Bright Start Direct-sold Plan uses Vanguard index funds (brightstartsavings.com).
How to avoid catching the attention of the IRS.