Now that Ahan, my son, is 7 months old and I have time to think, I started looking into college savings plans. The world of college savings plans is more complex than it has to be with every state having their own 529 plans, some good and some not so good. Then there is the Coverdell ESA, which used to be called an Education IRA. I’m in Virginia and I hope to give you some basics and also discuss the Virginia plans over the next few posts. I’m hoping that writing these posts and analysing the pros and cons will help me make the choice of what to pick along with helping you too.
Let’s start with the ESA basics today. An ESA is basically like a Roth IRA.
The Basics + The Good
- You can contribute $2000/child/year to ESAs (unless this drops back to $500 if not extended by congress next year). This includes all contributions made by everyone for the child.
- It can be used for almost any educational expense including k-12 (unless this benefit is not extended next year by the congress).
- The account is owned by the child. So any unused funds will be distributed to the child and not back to you.
- However as far as applying for financial aid goes it is treated as your account.
- High income folks >95,000 single and >190,000 joint filers can contribute less than 2000 and the benefit is completely phased out at 110,000, 220,000. Unfortunately, we don’t have to worry about that.
- The funds must be used by age 30 otherwise there are taxes/penalties
- The tax situation becomes complex if using ESA funds and planning on taking the Hope/Lifetime credit
If I decide to open an ESA, I’m thinking of using one of the companies we already have accounts with i.e. Scottrade or T. Rowe Price.
Part 2 will follow soon with 529 Plan basics.