Once you start a family, you want to give them the best of everything. You want them to get opportunities you had and ones you missed. One of the most crucial steps towards this is financing their college education. Now, with every passing year, a college education is becoming more and more expensive. The prices are skyrocketing, and not having a proper savings plan in place can work against you.
On that note, we are here to help you understand one of the most common options used for saving for college for students. This is the ESA or education savings account.
1. What is an ESA?
Being a tax-deferred trust account, an ESA is also referred to as Coverdell ESA. The government created it in order to help families streamline savings for college for students in a better manner. You can set up multiple ESA accounts for a single individual, but the maximum you can put in these accounts is USD 2,000. Additionally, the contribution you make towards these accounts needs to be in cash. There are certain terms and conditions as well as income brackets that apply for anyone opting for an ESA.
2. What are the main features of an ESA?
Some of the top features of an ESA include the following:
- The beneficiary can use the money until the age of 30. This can also be given to other members of the family so as to avoid taxes.
- The ESA is not only limited to college. It can be very well utilized towards other levels of studies such as primary and secondary school education.
- If the withdrawals do not meet certain criteria, they may be taxed, so the terms should be carefully read before withdrawing any money.
3. What are the cons of ESA?
Some of the cons of the ESA that may make you reconsider it include the following:
- The contribution limit for this plan is capped at USD 2,000 on an annual basis for individuals.
- When it comes to non-qualified withdrawals, the beneficiary would need to pay certain taxes.
- Also, you need to be in a certain income limit to qualify using this plan.
- The amount needs to be used by the beneficiary before they turn 30 years of age.
However, even if it has not been used by an individual for their education, it can be transferred to a family member, in case the age limit runs out. So, we recommend that once your financial goals are in place, you should carefully consider this plan to help streamline the education of your children further. This way, saving for college for students would not be a tough option and they can have an education that helps them move towards their future goals in life.