Use Education Savings Plans to Boost Your College FundSubmitted by WWK Wealth Advisors on January 19th, 2016
A growing number of parents are becoming concerned over the limitations of their college savings options and the poor returns they’re generating. 529 college savings plans have been criticized for their anemic returns and high fees, and parents are often limited to plans available in their state. One option that is receiving much more attention by college savers seeking greater returns is the Education Savings Account (ESA). The big reason is that, with an ESA, you are free to establish an account with any financial institution and invest in any vehicles offered through that institution. This will enable you to fashion together your own mix of investments tailored to your growth objective and risk tolerance.
ESAs are limited to $2000 annual contributions which phase out for adjusted gross incomes over $100,000 (200,000 for joint filers), but the earnings grow tax free, and the funds can be withdrawn tax free when used for qualified education expenses, including elementary and secondary expenses. One of the appeals of ESAs is that they also allow for “community” contributions – that is, any family member can make a contribution as well, as long as they too are qualified under the AGI limitations and the total contribution to the ESA doesn’t exceed the $2,000 maximum.
Withdrawals from ESAs are tax free to the student as long as they are used for qualified education expenses – i.e. tuition, books, and room and board if offered by the school. The other big appeal of ESAs is that the funds can be used to pay for certain elementary and secondary school expenses as well. Any funds not spent on eligible expenses by the time your child turns 30 are then taxed as ordinary income to your child.
Finally, any amount of money accumulated in an ESA does not preclude you from qualifying for certain education tax credits such as the Lifetime Learning credit. And, because an ESA is owned by the parent, it isn’t counted towards eligibility for financial aid, which bases most of your child’s eligibility on his or her own assets and income.
The contribution limitation is the only real negative for ESAs, but it shouldn’t be a deterrent. An ESA can be combined with other college savings methods including a 529 plan. As with any other long-term objective, an education savings strategy should include a properly diversified portfolio of investments allocated across several asset classes.
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