As kids head back to school and their thoughts turn to word problems and math tests, you as a parent, grandparent, or other interested friend or relative may turn your thoughts to how you can be more involved in planning for their future education. A Self-Directed Coverdell Education Savings Account (CESA) may be a good option.
This is a federally sponsored, tax-advantaged trust or custodial account. Formerly known as the Education IRA, it is designed to pay for qualified education expenses. With a Self-Directed Coverdell ESA, you have the additional benefits that come with a Self-Directed IRA.
What if you could invest in what you know to grow funds for your child’s education?
A Self-Directed Coverdell ESA gives you more investment freedom and provides the benefit of investing in assets that self-directed accounts allow. These investment choices include assets such as real estate, private companies, precious metals, lending money in the form of promissory notes, and more! You are able to make investment choices based on your own experience and what you know while working with IRA Innovations as the administrator of your account.
Earnings from your investments will grow tax-free, and you will have access to a larger range of investment choices. By investing in non-traditional assets, you may be able to increase the wealth of the account more quickly than with traditional investments like stocks, bonds, and mutual funds. If your child’s CESA does not have enough money to purchase an investment, it’s possible to partner it with other funding sources, such as other IRA(s) or CESA(s). This can help you build more funds for your child or grandchild’s future.
How much do you know about the basics of Coverdell ESAs?
You can open a Coverdell ESA for students and make contributions to the account until the child turns 18 years of age, and the funds must be withdrawn and spent before the student turns 30 years of age. For special needs students, there are no age restrictions for withdrawals.
You may make annual contributions of no more than $2,000 per year until the beneficiary reaches the age of 18. Contributions must be made in cash. Distributions of the earnings are tax-free if used to pay qualified education expenses for grades K-12 and college. Like the Roth IRA, the contributions to a CESA are not deductible; however, funds contributed to the account grow tax-free until the beneficiary takes a distribution. The withdrawals are tax-free as long as the withdrawal does not exceed the beneficiary’s qualified education expenses. By self directing the investment of Coverdell funds in alternative assets, there will be the potential to see those funds grow even more!
Individuals can make withdrawals from a Coverdell ESA to pay for qualified education expenses for public, private, or religious elementary and secondary schools. Withdrawals can also go toward college, university, and vocational school or other post-secondary educational institutions that can participate in a Department of Education student aid program. This includes all accredited public, nonprofit, and private post-secondary institutions.
There are many types of expenses that funds from a Coverdell ESA may cover. These qualified expenses may include:
- Tuition and fees
- School supplies and other equipment, such as computer equipment
- Academic tutoring for qualified elementary and secondary education
- In certain cases, the cost of room and board, transportation, and uniforms
- For students with special needs, Coverdell ESA funds can also go toward special needs services
If there is a remaining balance in a Coverdell ESA when the beneficiary reaches age 30, it must typically be distributed within 30 days. The earnings on the account will be taxable and subject to an additional 10% tax. It’s possible to avoid these taxes by rolling over the full balance to another child’s Coverdell ESA in the same family. This must occur before the primary beneficiary turns 30.
Friends and relatives can contribute to a Coverdell ESA. In the case of an individual, he or she must have a modified adjusted gross income of less than $110,000 to make contributions. Couples are able to contribute if they make less than $220,000 combined. The student for whom the account is established can also make contributions, and since 2002, some corporations may also make contributions.
If you would like to invest in your child or grandchild’s future, our team at IRA Innovations will be happy to help you open a Coverdell ESA. Contact us on our website, or call us at (205) 985-0860.
Learn more about Self-Directed IRAs from IRA Innovations in Birmingham, Alabama, and find answers to frequently asked questions.
IRA Innovations provides self-directed retirement account administration and education in Birmingham, AL, Tuscaloosa, AL, and Nashville, TN. As the experts when it comes to “alternative” investments including private equities, they can provide the necessary tools and information to get started with a Self-Directed IRA. IRA Innovations does not endorse any products or sell any assets. IRA Innovations does not provide tax, legal, or investment advice. Please consult your legal, tax, or financial advisor for any advice you might require.