Is that Education Savings Account Ready to go Back to School?

Published on August 1, 2019

Before we know it, tuition bills for fall semester will be due, books will need to be purchased, and school fees must be paid. The tuition at colleges and trade schools can be pricey, and student loans may not be the answer for all students. However, paying for school and school-related expenses with money from a Coverdell Education Savings Account (ESA) can be a big help for many.

Any adult can establish an ESA for any child under 18 years old—the beneficiary does not need to be a relative. ESAs offer flexible options as a tool for saving for education:

• The ESA can be used by the beneficiary up until age 30 for all qualified expenses, such as tuition and books.
• The money can be transferred to another family member under age 30 if it will not be used by the original beneficiary in time.
• The money is not restricted to college – the ESA can be used for primary and secondary school as well.
• You don’t have to contribute every year.
• A trust or corporation may make contributions to an ESA for an eligible student.
• The money grows in the account tax free and qualified withdrawals are also tax free. If the money is used for a nonqualified expense, there could be taxes or penalties associate with the withdrawal.

Although ESAs are somewhat similar to 529 plans, there are a few key differences, such as income restrictions for the contributing individuals and annual contribution limits. It’s always wise to check with your tax advisor or financial planner before opening a Coverdell Education Savings Account to ensure you are opening the type of investment account that makes the most sense for your specific financial situation and goals.

Self-directing the funds in an ESA can help boost that return

Whether you want to help cover expenses for private school, college, or trade school, you can give your student extra help if you choose to self-direct a Coverdell ESA.

Savvy investors may choose to self-direct an ESA and hold real estate, precious metals, commodities and more – they may even already be invested in these types of assets outside one of these accounts. The difference is that the returns from those investments will be tax-free as they grow. Although you potentially have a maximum of 18 years in which to build up a Coverdell ESA (from a child’s birth through age 18), investors who self-direct their retirement plans know that by including alternative assets, they are able to build a more diverse portfolio that is not dependent on the ups and downs of the stock market. One can look at it as an investment strategy that could make a great high school graduation gift.

You can open an education savings account with Next Generation and fund the account via transfer, by initiating a rollover, or by contributing funds with a check. If you have any questions about self-direction as an education savings strategy, or need assistance getting your ESA open, contact Next Generation by email at NewAccounts@NextGenerationTrust.com or by calling 888.857.8058.

Alternatively, you can schedule a complimentary education session with one of our representatives.