Starting Early: How an Education Savings Account Can Pave the Way For Future Choices
The end of the school year is fast approaching. Another year in the books! Whether you are celebrating the move to first grade or the official start of high school, the years seem to fly by. It is never too early to start thinking about what is next after high school. If college, trade or technical school is a future consideration, starting to save now can make it much easier to make the transition after the final year of high school.
One of the easiest ways to start saving for post-secondary education is with a Coverdell Education Savings Account (ESA). The Coverdell Education Savings Account is a type of IRA that allows not only parents, but other relatives and even family friends to contribute to a child's account. Non-deductible contributions each year can be up to $2,000 total for all contributors.
The contributed funds grow through investments, much the same as a retirement account, and earnings are tax-deferred. That means the earlier you start making contributions, the more your child's account will be able to grow. The account beneficiary can then use the account to pay for education expenses
until age 30. The Coverdell ESA can be set up in a way so that it does not affect other financial aid that the child may be eligible for. Funds withdrawn for education expenses are not taxed, however, funds not used for education expenses carry a tax penalty. A student that is not able to use all of the funds prior to age 30 can transfer the remaining funds to a sibling or close relative. Which is a great option, should your little one be a future recipient of a full scholarship.
Another reason to start a Coverdell ESA early is that funds from the Coverdell ESA can also be used to pay for K-12 education expenses such as private school tuition, books and supplies, tutoring and special needs services. This allows you more options should your child need to switch schools, have an opportunity to attend a private school that meets his/her needs or have need of additional special needs services while attending elementary or secondary school. In fact, the Coverdell ESA fund further protects children with special needs by removing the requirement for the funds to be used by age 30.
If you're interested in starting a Coverdell ESA for a child in your life, talk to your GBU agent or schedule an appointment at GBU.org.
