Education Savings Accounts – It’s Never too Early to Start Investing in Alternative Assets
Published on May 21, 2020
The baby’s born, the gifts and cards are delivered . . . and investors with an eye toward the future open an education savings account (ESA).
An ESA is a federally sponsored, tax-advantaged, flexible savings tool that enables friends and family to help fund a child’s education through contributions to the account. Any adult can establish an ESA for any child under 18 years old or with special needs.
The funds can pay for private elementary or high school, trade school, or college. Qualified expenses include:
- Tuition and fees
- Room and board
- Books, supplies and equipment, school-related technology
- Academic tutoring
- Required school uniforms (primary and secondary school)
Designated beneficiaries can receive distributions, tax-free, to cover qualified education expenses. These expenses can also be paid directly from the account to the educational institution. The beneficiary has until age 30 to use the funds for all qualified expenses.
If the original beneficiary won’t be using all the funds in time (excluding special needs students), the account can be transferred to another family member under age 30. The funds can also be distributed to the beneficiary when he or she reaches age 30; this distribution is taxable and a 10% penalty may be triggered if the distribution is not for qualified education expenses.
- The accounts offer a double tax benefit – the funds grow tax free and qualified withdrawals are not taxed (provided the withdrawal does not exceed the beneficiary’s qualified education expenses).
- Anyone can contribute to the ESA, including a trust, corporation or the student, until the designated beneficiary attains 18 years of age.
- Contributions are discretionary; there is no annual contribution requirement.
- Contributions can be made up until the contributor’s tax filing date.
Education savings accounts have certain limitations, such as income restrictions for contributing individuals and an annual contribution limit per individual beneficiary of $2000. However, opening a self-directed ESA can help boost the growth of those contributions by investing in non-publicly traded alternative assets.
Instead of relying on stocks, bonds or mutual funds, the account owner can invest in real estate, private placements, hedge funds, precious metals and many other nontraditional investments a self-directed ESA would allow. Including alternative assets within an ESA provides a hedge against stock market volatility and diversifies the portfolio.
Self-directed ESAs are handled by a third-party administrator for self-directed retirement plans, like Next Generation Services. As with any self-directed retirement plan, the account owner makes the investment decisions and provides instructions to the administrator. In the case of Next Generation, our sister firm, Next Generation Trust Company, custodies the assets, providing comprehensive account services under one corporate umbrella.
If you’re interested in opening a self-directed ESA for a minor under the age of 18, schedule a complimentary educational session to get answers to your questions about self-direction as an investment strategy. Alternatively, you can contact us directly via phone at 888.857.8058 or email us at NewAccounts@NextGenerationTrust.com.Back to Blog