Getting Educated About Self-Directed Education Savings Accounts

Published on May 30, 2019

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.