ESA College Savings

A college degree is non-negotiable in today’s changing job market, but education planning for your kids can seem like an overwhelming task. If you’re like the rest of us, you’re getting financial advice thrown at you from every direction–and you’re trying to sort through it all to make the wisest decisions for your family and to best prepare for your child’s college education.

Helping your children out with their college education is a big part of that–but it can also be one of the most stressful parts. To make your options a little bit easier to consider, we here at PaydayLoansCashAdvance have compiled information about one tempting savings option: an ESA, or Education Savings Account, for your child.

Intro to ESAs

ESAs, previously called Coverdell Education Savings Accounts, are savings accounts meant to make it easier for you to prepare for your child’s college education while getting a tax break on the funds you deposit. Qualified individuals can make deposits of up to $2,000 per year into a child’s account; these deposits are non-deductible, but they grow free of federal interest charges and can be invested in mutual funds, bonds, or standard savings account.

This account is considered an investment trust account and has the beneficiary’s name on it, which means you can’t back out and close the account at will; all funds within it will go to the person for whom it was established. ESAs provide a great way for parents, grandparents, or other individuals to help out a minor pay their way through college–an increasingly important and difficult task. Keep in mind that all contributions must be made before the beneficiary turns 18.

By making preparations early on for a child’s success, you’re making an investment in their education that will broaden the perspective through which they see the world. That’s a pretty good use of your monthly spare change.

Eligibility Requirements for ESAs

Throughout the education planning process, it’s essential to understand the eligibility requirements for various federal financial aid programs and savings plans in order to best help your child out with his or her college education. Here are the latest eligibility requirements for Educational Savings Accounts:

  • The contributor may or may not be related to the beneficiary
  • The beneficiary must be under 18 years old when the account is established
  • The contributor’s modified adjusted gross income must not exceed $190,000 for a $2,000/month contribution ($95,000 for single filers)

If your income is above the allowable limit, you may gift the money to your child for him or her to make the contribution himself; this is completely allowable.

Where to Set Up an ESA

You’ve decided to set up an ESA for your child or grandchild. What next? Where do you go to get started? We recommend starting out at your local bank or an investment company. Just about every financial company can oversee an Educational Savings Account and ensure that the correct paperwork is filed so that your contributions are tax-free.

A variety of investment types qualify for ESAs, so you’ll have significant flexibility in setting up your plan. Some options are:

  • Bonds
  • Certificates of Deposit (CD’s)
  • Mutual Funds
  • Stocks

ESAs cannot be invested in life insurance policies, but options are plentiful. Talking to your financial advisor or banker is probably the best way to approach education planning and to determine which type of investment is right for you. The answer will likely depend on how early you start the ESA for your child–and, as a result, how long the money will be in the account to grow.

It’s time to start school. How can my child withdraw from the account?

Say your child or grandchild is ready to start college. The education planning phase is over, and now–for him or her–the academic book work begins. How can the beneficiary of the account withdraw from this investment trust fund?

In a year when the beneficiary of an ESA incurs “qualified higher educational expenses” (termed QHEEs), all the beneficiary has to do is go to the bank or investment firm and make a withdrawal just like he or she would from any other bank account. If the withdrawal is higher than the QHEE for that year, the beneficiary may be subject to an income tax and an additional 10% penalty tax on the withdrawn funds.

It’s important to note that once money is invested in an ESA with a named beneficiary, the contributor no longer has access to those funds, though he or she is the custodian of the account for the child. If the child decides not to attend college, those funds will become available for withdrawal, but will be subject to standard federal income tax. The ESA must be completely withdrawn by the time the beneficiary turns 30.

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