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For 40 years, The Entrust Group has provided account administration services for self-directed retirement and tax-advantaged plans. Entrust can assist you in purchasing alternative investments with your retirement funds, and administer the buying and selling of assets that are typically unavailable through banks and brokerage firms.

How to Help Pay Educational Expenses and Watch Your Account Grow Tax Free

ESA.pngEstimated reading time: 3 minutes 

Along with a diploma, the average 2016 college graduate has $37,712 in student loan debt, a 6% increase over the class of 2015. If you add up the debt owed by all 44.2 million Americans who have student loans, it totals $1.45 trillion. That means Americans owe more student debt than credit card debt. (These and more detailed statistics are available on Student Loan Hero. 

This level of indebtedness has consequences. For example, 40% of young people age 18 to 24 are living with their parents, the highest percentage since 1940. Studies have shown that graduates with high student debt are less likely to start their own businesses, to buy their own homes at a young age, and they hesitate to take jobs in the public-interest sector because of the lower salaries offered.

And that doesn’t even take into account the amounts spent on preschool and private school tuition at the elementary through high school levels. Those sums can easily reach into the six-figure range and more before reaching college.

Fortunately, if you are the parent or grandparent of a school-age child, you can help support that child in reaching his or her educational potential.

Educational Savings Accounts

Educational Savings Accounts (ESAs), also known as Coverdell Accounts, are a tax-advantaged way to save for a child’s education. While you pay taxes on the contributions to an ESA, the earnings are tax-free if used for education. grow tax-free, if used for education.

You can use the funds in an ESA to pay for:

  • Tuition at any educational institution, including elementary, secondary, college, and vocational training*, whether public or private.
  • Educational expenses, such as uniforms, computers, and supplies.

*Vocational schools must meet the criteria to receive federal aid, not all vocational schools are eligible for an ESA.

How Much to Contribute and Who Can Benefit

You can contribute up to $2,000 annually for each beneficiary. For example, if you have three grandchildren who will become beneficiaries, you can contribute $6,000 in a year. You don’t have to contribute to an ESA every year; the choice is yours.

A beneficiary must be under age 18, unless they are a special needs beneficiary. (IRS regulations define special needs as individuals as age 18 or older, who are eligible for Supplemental Security Income due to blindness or disability.)

When the money is needed to pay for an eligible expense, you can transfer the funds to any family member under age 30, who must use them for the intended educational purposes.

Even if you contribute less than the $2,000 maximum or if you skip a year here and there, the tax-free earning growth on the account can add up over the years. And when you take distributions, the money you take out is not taxed if used for education.

The Advantages of a Self-Directed ESA

Just as with a Self-Directed IRA, when you open a Self-Directed ESA, you control what assets you invest in using the account. This gives you the freedom to invest in what you know best, whether that is real estate, private placements, or precious metals. This kind of diversification of your investments can protect you against market volatility.

It also means you aren’t limited to the range of investments offered by a brokerage firm of bank.

The trained professionals at The Entrust Group are well-schooled in ESAs. Call 800-392-9653 or request a free consultation online today to start your own education on the subject of Educational Savings Accounts.

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Self-Directed IRAs:
The Basics Guide

Learn about your investment options, Self-Directed IRA rules, and much more!

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