My cousin Owen, and his wife Susanna, have two wonderful children. Francis is nine, Blount is seven, and they are both smart as a whip. Just last week they both brought home ribbons from the school science fair. Francis created a volcano that probably registered as the second largest eruption in the U.S. since Mount St. Helens blew! Her parent’s smiles only faded after an hour of mopping the school gym’s floor. Blount foraged the woods behind his house and created a nature collection the Smithsonian museums in Washington D.C. would be interested in. He had 15 different types of oak tree leaves, some dried poison oak with the corresponding rash on his arm, a couple of tasty morel mushrooms, a six-foot long snakeskin, an arrowhead, a bullet and button from the Civil War, and the showstopper was an adult cow skull that Owen must not have buried deep enough a few years ago to keep away from the coyotes.
After the kids were in bed that evening Owen and Susanna talked about how in just a decade, both kids may be off to college. You do not have to listen to the news for long these days to hear about the college debt burden that many Americans are carrying, and they want to try to help their kids avoid some of that if possible. They decided to call me up to talk about different ways to save for their children’s future education expenses.
We spoke about two primary investment vehicles that are tax advantageous ways to save for educational expenses. One is the College Savings Plan, and the other is the Coverdell Education Savings Account (ESA). Both are after-tax accounts, meaning you don’t get a current-year federal tax deduction for your contributions, but any qualifying withdrawals will be 100% tax free, and your investments will grow and compound tax-free while in the account.
Some of the key differences between the two are that the College Savings Plans are state run. However, you do not necessarily have to contribute to your home state’s College Savings Plan. The College Savings Plan also typically has a lifetime contribution limit. For example, the South Carolina limit is $540,000 and the Tennessee limit is $235,000 per beneficiary.
The ESA account annual contributions are capped at $2,000. Also, the funds in the account must be distributed by the beneficiary’s 30th birthday.
Another item to be aware of is that if you do not use your college savings plan for eligible education expenses, withdrawals may incur a 10% penalty and be subject to federal income tax.
For a more detailed overview of both accounts check out the lawsfinancial.com site or give us a call! These savings accounts are a great way to assist future scholars, like Francis and Blount, with those growing tuition bills.
Sources:
https://futurescholar.com/resources/common-questions/ (SC CSP)
https://tnstars.treasury.tn.gov/ (TN CSP)
