Education savings accounts (ESAs) are cool little tools that allow you to save and accrue income for your child’s education. ESAs are commonly established by parents for their children, but, contributors can include anyone from grandparents to the beneficiaries of the accounts. Annual contributions limit out at $2,000 per child and can be made until the child turns 18 years old. Although the IRS requires all distributions to be taken within 30 days after the beneficiary turns 30, this provides adequate time for most individuals to complete education requirements of their choosing.
Self-directed ESAs allow you the added benefit of using funds from the account to invest in alternative assets—not simply stocks, bonds, and mutual funds. Alternative investments include real estate, private lending, oil and gas options, private equity, crowdfunding, and much more. The premise of self-direction is to invest in things that you personally know and understand instead of relying on a third party to make these critical decisions for you. By investing in assets that are not the typical Wall Street norm, you can potentially grow wealth at a faster pace than traditional investments offer.
Consider opening an education savings account if:
- Your dependents will attend an educational institution (elementary, secondary, public, private, or religious).
- You want savings to grow tax-deferred or tax-free.
- You would like investment funds that can be used for various educational expenses such as uniforms, computers, and transportation for school.
- You have a child with special needs, for whom there are exceptions.
Consider self-directing an ESA if:
- You want the ability to build income on a tax-free basis for your child’s education.
- You would like the ability to control the account funds and investing decisions within the ESA.
- You want the potential to grow income in the account at a faster pace than traditional investments present. Alternative assets such as real estate, private equity, timberland, tax liens and deeds, and more offer that potential.
- You want diversity among your investment choices to offset any losses other assets may incur.
Contributions to an ESA are not tax deductible. However, the earnings are tax-free, which is why self-directing an education savings account can be incredibly beneficial in financing your child’s education. Because you get to choose your own investments, you increase the earning potential of the account and hopefully achieve the goal of providing a valuable education to your child.