Get Schooled on Self-Directed Education Savings Accounts
There are several investment/savings options available to individuals who want to give the gift of education to children. An education savings account (ESA) is an excellent supplement to other education savings (such as a 529 plan) with tax advantages. Also called a Coverdell Education Savings Account, this is a trust account created by the U.S. government.
An ESA may be used to cover qualified expenses related to primary, secondary, or higher education, from kindergarten through college or post-secondary trade school. Withdrawals are tax free (free from federal income tax) when used for eligible expenses. These include tuition, books and supplies, computers/equipment, transportation, school fees, and room & board. Children attending public school or private school may use the funds for qualified expenses.
Self-directed ESA investments
As with any other type of self-directed plan, an education savings account can include a range of alternative assets. Depending on need and time horizons for taking qualified withdrawals, there are opportunities to boost the $2,000 annual contribution limit through nontraditional investments such as private equity, secured and unsecured loans, real estate, precious metals, and many more.
Baby Sarah’s grandparents want to contribute to her education and open a self-directed ESA – they can contribute up to $2,000 annually. Sarah’s parents are also putting money away for the baby’s education. They plan to register her into public elementary school but may consider private middle/high school.
Every year, Sarah’s grandparents contribute $2,000 into her ESA, and begin investing the funds in an alternative asset with which they have years of experience.
As the value of Sarah’s ESA grows beyond the $2,000 annual contributions, she will have funds to use for books and supplies or can withdraw funds to cover tuition costs at a private high school or for college, to supplement her parents’ savings. Plus, her grandparents can continue to contribute to the ESA until Sarah turns 18—and continue to diversify the accounts’ holdings through other self-directed investments they already know and understand.
Their $36,000 gift over those 18 years can grow exponentially through the power of nontraditional investments not typically affected by the stock market, provide Sarah with more money to use for her education, and give mom and dad a little help along the way.
- Contributions may be made for beneficiaries until they turn 18; funds must be used within 30 days of the student turning 30 years old. (There are certain exceptions for special needs students.)
- The funds in the account can be transferred into another ESA for a relative under 30 years old.
- The total maximum contribution for any single beneficiary (even with multiple education savings accounts) is $2,000 per year.
- Contributions are considered gifts by the IRS and are not tax deductible.
- There are income guidelines regarding who may contribute. The 2020 limits are as follows:
- For a married couple filing jointly with modified adjusted gross income (MAGI) between $190,000 and $220,00, a partial contribution is permitted; for those with less than $190,000 MAGI, the full $2,000 contribution is permitted.
- Solo tax filers must have MAGI of $95,000-$110,000 to make a partial contribution, and less than $95,000 MAGI to make the full $2,000 contribution.
- Corporations and trusts may contribute to an ESA without the restriction on adjusted gross income.
- There is a 10% IRS penalty on earnings (with certain exceptions) for non-qualified withdrawals.
If you have questions about how to get started or about the alternative assets allowed in self-directed accounts, you can schedule a complimentary educational session with one of our knowledgeable representatives. Alternatively, you may contact us at directly via phone at 888.857.8058 or send an email to NewAccounts@NextGenerationTrust.com.
Education Savings Accounts – It’s Never too Early to Start Investing in Alternative Assets
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.
Is that Education Savings Account Ready to go Back to School?
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.
Getting Educated About Self-Directed Education Savings Accounts
Thoughts of college are in the air at this time of year, with PSATs, SATs, ACTs and other tests. High school juniors are deciding where to apply to school and seniors have decided where they’ll enroll in the fall.
While college is an exciting time for students, it can be a bit stressful for parents when it comes to making those tuition payments. Even with financial aid, there are plenty of expenses to cover and in many cases, the financial aid does not go far enough.
That’s where Coverdell Education Savings Accounts (ESAs) come in. Many parents and grandparents set up these accounts when a child is born, and contribute to the ESA annually to build up savings to pay education-related expenses. The 2019 annual contribution limit is $2000 per beneficiary (contributed up to age 18), which can be invested and earn tax-free income.
Here are some of the benefits that ESAs have to offer:
- Coverdell ESAs are tax-advantaged so long as the money in them is used to pay for education expenses—which are not limited to higher education only; the funds may be used for qualified elementary and secondary school expenses as well.
- If the distribution is less than the beneficiary’s qualified education expense, the beneficiary (student) will not owe federal income tax.
- The money is considered the beneficiary’s money when applying for federal student aid, which may reduce the amount of student aid the student receives.
- The funds in the account can be used by the beneficiary up to age 30 or be rolled over to another plan.
Self-directed ESAs – the flexible way to build up education savings
Did you know that when ESAs were first introduced in 1997, they were called Education IRAs?
And did you know that, like all other types of IRAs a Coverdell ESA can be self-directed, so that the funds can be invested in alternative assets?
A Coverdell ESA that is opened with a custodian of self-directed retirement plans—like Next Generation—can include the same types of nontraditional investments as other self-directed plans. That way, if the stock market tumbles, the account provides a hedge through the use of those nontraditional investments, such as real estate, precious metals, private equity, notes, and more. Parents or grandparents who already have the knowledge and experience with these types of investments can apply that experience to the student’s education savings through self-direction—and help grow their contributions over time.
Think of the high school graduation gift you could give your child or grandchild years from now, with a self-directed ESA that has grown in value through nontraditional investments. At Next Generation, we offer a plethora of resources to learn more about Coverdell ESAs and the benefits of self-direction. Because client education is so important to us, we’re here to answer your questions about self-direction as a savings strategy—for education expenses or retirement. Contact Next Generation at 1.888.857.8058 or email NewAccounts@NextGenerationTrust.com if you need assistance.
Alternatively, you can sign-up for a complimentary educational session with one of our representatives.