Education Savings Account (ESA)

Self-Directed Education Savings Account

An education savings account (ESA), also known as a Coverdell savings account, is a custodial account similar to a Roth IRA—except funds must be used exclusively for paying education expenses for the beneficiary. Qualified educational expenses include tuition, books, and fees that are associated with qualified elementary, secondary, or higher education institutions. These are a popular alternative to state 529 plans, and anyone can contribute to the account, including the designated beneficiary.

A self-directed ESA works just like a regular ESA, except you can invest in a wide variety of alternative assets in a self-directed plan. This asset class exceeds the typical offerings of banks and brokerages.

Features

  • Self-directed education savings plans can invest in private lending, hedge funds, private equity, real estate, and more
  • You do not need earned income to contribute to an ESA
  • Contributions are discretionary and not required annually
  • Contributions can be made as late as the contributor’s tax filing date
  • Funds can be transferred to an education savings account of any eligible family member under the age of 30
  • Contributions are not tax deductible, but the earnings are distributed tax-free (consult a qualified advisor for guidance)

Family-Son-Graduate-Education-Savings-Account-ESA

Family-Parents-Children-Education-Savings-Account-ESA

Eligibility

  • You can contribute up to $2000 annually per child until their 18th birthday
  • There are exceptions for special needs individuals; consult with a professional for more information
  • The account must be opened with a cash deposit

Distributions

  • Distributions for qualified education expenses are tax free
  • Funds must be used before the beneficiary reaches the age of 30 (unless the beneficiary is a special-needs individual)
  • Unused funds can be transferred to an ESA of another eligible family member before the primary beneficiary turns 30 years old
  • If not transferred to another family member’s ESA, unused funds are distributed at age 30, are taxable to the beneficiary, and may be subject to a 10 percent penalty

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Contribution Limits of a Self-Directed Education Savings Account

Education Savings Accounts (ESA) 2018 2019
Per Year, Per Beneficiary $2,000 $2,000