Best College Savings Plan

Full Transcript

This is the best tax-free college savings plan, in my opinion, and I use it with all of my kids. Now, there are three points that I'm going to go over with this type of account to help you understand why I think and why I use this particular account for my kid's college planning. Now, the first one is going to be that there are no income limits Well, the 529 plan also doesn't have any income limits.

The second point that I'm going to talk about is the tax-free growth that you can get in this account. Again, just like the 529 plan, there is something that this type of plan has that the 529 plan does not. And that is even more control over your investment options. And before we get into the video and talk about this account and the points, even if you don't want to do the investments yourself, the investment choices inside of this plan are significantly larger than the 529 plans which usually only means you can get better performance in your plan with more control.

Again, I'm going to say that's more of my opinion, but with any investments that you want to put in this plan, it's pretty darn good.

What's going on, guys? Welcome back to the Channel. My name is Travis Sickle. If this is your first time on our channel, Welcome to the Channel. Let's get right into it.

So I want to talk about a resource, and I'll tell you what this plan is.

It's the Coverdell Educational Savings Account, and I'll probably put it in the title. So you probably already knew that. And I've talked about this in other videos. I use it with my kids. The only thing that is different, and I'll say this upfront, is the amount you can put into this plan on an annual basis.

But it works great. If you also have a 529 plan, which I do for all of my kids. In fact, we have two 529 plans for each one of my kids. But I use this because of the control and the tax-free growth that you can use inside of this particular plan. And I'm going to give you a great resource because this is going to be a comprehensive video I just want to go over the points that I think are very valuable in looking at the Coverdell Educational Savings Account for your college planning and also K through 12, just like the 529 college savings plan.

And this is going to be the educational publication from the IRS. And I want to just bring it up for a quick second. So you can thumb through it. It's written in more layman's terms. So it's a little bit easier to understand, but it's a great resource. And I use this stuff all the time to go over the facts and to make sure that all the points are in there because that's what these guides are basically written for.

Now, they're not tax laws, but they are guides that you can use to figure out which plan is right for you. And this is the publication its publication 970. And this is written by the IRS, the tax benefits for education. And this is the 2021 edition I don't believe 2022 is out yet. But if we scroll down a little bit you see all the different types of plans and credits, anything educational related here and you can see chapter number six is for the Coverdell education savings account also known as the ESA.

And if we scroll down to it we can see that it's talking about the income limits of $2,000 excuse me the contribution limits of $2,000 per beneficiary or your income limits of $110,000 and $220,000. And I'm going to talk about, even if you make above or below that whatever doesn't matter, I'm going to show you strategies that you can fund this at any income level.

It doesn't matter. You just have to know how to do it. So this is a great resource if you want to just kind of get the comparisons Again, it's going to answer simple questions. What is the ESEA? Where can it be established? Basically, any broker-dealer will have an ESA account for college savings, or most of them, or who can have it.

Coverdell Educational Savings Account. You have to be under the age of 18 or have special needs where you can actually fund it after the age of 18, and you have to spend it by the age of 30. So basically you're college years for most unless you're special needs a little bit different. So that was just a quick publication that you should take a look at.

I'll see if I could grab a link to this and put it in the description at the bottom so you can follow along. But let's first talk about the no income limits, and that's the point that I wrote down first and I want to talk about. So you saw there that there are income limits. And let me pull up a comparison chart for the 529 plan, along with the Coverdale Educational Savings Account.

You can see I highlighted it right here. So let me zoom in here just so we can see this together, and I'll pull it over here and make sure that you guys can see it. So the 529 plans are on the left where it has no income limit. I talked about no income limits, but there is an income limit with the Coverdell Education Savings Account, and that phaseout goes from $95,000 to $110,000 or $190,000 to $224,000 married filing jointly.

What the range is, is a phaseout. So if you make $95,000 or less and you're single then you can fund directly into your child's Coverdell Education Savings Account ESA and if you're married, filing jointly, $190,000 or less. And as you move closer to either $110,000 or $220,000, the phaseout begins and it's an equal amount as you're moving through that.

So if you say for example, if you're in the middle of these incomes can't do this math in my head. But if you're doing this, this income, if right in the middle of it, you can do 50%. So it would be $1,000. That's how you would do it right there with the $95,000 to $110,000, once you get over that, you can't do it directly.

But like I said, here's the tax loophole. If you have an S-Corp or a C corporation, then you can fund it directly with no income limits. You can actually also do this with a trust, but you would then need to have the trust set up. So if you are a small business owner that owns an S-Corp, then you can fund the ESA at any income level.

So there's another loophole too that is to open up a UTMA account. So that is a regular investment account for your child. Just gift $2,000 and have them make the contribution because they're likely not to have income of $95,000 to $110,000 or. Yeah. They're obviously going to be single. So $95,000 to $210,000. So therefore they can make it directly for themselves and you're basically gifting that's $2,000.

So it's under the maximum amount that you can get without any taxable events so you can fund it that way. So two easy ways if you, if you don't have a small business that can fund it directly, then you can just gift it to your child and then they can fund it, and voila. Then you can just make the contribution.

It doesn't have to be earned income. So that is kind of interesting when it comes to this type of account. It is unlike the Roth IRA where you have to have earned income, you can't gift your child money to make the contribution to the Roth IRA, but you can do it with the Coverdale Educational Savings Account. And another thing to note is that it is per benefit theory.

So if everybody in your family got together and they wanted to contribute 2000 to an ISA for your child, they could not. It has to be 2000 aggregated for all contributors. So if you're going to do 2000 nobody else can contribute to the ISA, but that is how you can get through the income limits the second thing I want to talk about is tax-free growth in just like a Roth IRA.

It's going to go into this type of account and it's going to grow tax-deferred and tax-free as long as you're taking it out for educational purposes or qualified educational expenses. Again, publication 970 to help you sort out if you're thinking about, well, can I use it for this? Can I use it for that? We're not going to go over it in this video, but it is tax-free growth for qualified educational expenses.

So that is a huge benefit, similar to the Roth IRA so it's not deductible going into this type of account, just like the Roth IRA or the five 29 plan gross tax-deferred, tax-free, just like five 29 plan Roth IRA. And then you can use it for qualified educational expenses come out tax-free to really you're looking at the benefit of the growth.

And that's why I like to use these plans in conjunction because you need the time, you need that runway to actually realize the benefit of these types of accounts. If, you know, if you're kids in kindergarten, you're starting to fund it, but you're going to use it earlier on in college savings plans. They don't work. It doesn't make any sense.

Even the 529 plan to use it for K through 12 doesn't make sense. So you don't want to get caught there if you're trying to fund it and then use it immediately, it's the growth. That's where the benefit to these types of accounts comes in. And even with this cheat sheet, here that I have and I think I got this one from the IRS to actually know I got it from our broker-dealer somewhere else.

I don't know. I got this one a while ago. So anyways, we look at the 529 plan versus the Coverdell educational savings expenses and go look for the qualified expenses right here and you can use them both for K through 12. This is a big difference. And this was a recent change for the five 29 plans. Rick can use it for the apprentice program apprenticeship programs.

I wouldn't be surprised if at some point they do that for the educational savings account. I think most people don't talk about it or actually I know they don't talk about it quite as much as they do with the 529 plan. So that's why you see less legislation on the essays or the expansion like you would with the 529 plans.

I wouldn't be surprised if some politicians even know what the essay was, but they have heard of the 529 plan. So that is something that is interesting about these types of accounts that you can use and there's a lot of flexibility now them and now the biggest one is the one that I left off or put on last and that's the third one and that is any type of investment that you can invest into basically any security you can use in the Coverdell ESA.

So if you want to have your own stock portfolio your own mutual fund, ETF, bonds, whatever alternative investments, you can do it with the educational savings account where the 529 plans are limited to what's ever inside of the 529 plan. So not quite as rosy not really ideal. I like to have more control obviously this is what I do so I invest.

So I like to have that control in designing the exact portfolio that I want for that plan. And there are a lot of benefits, not even just being more aggressive like saying, okay, I don't have to have these diversified mutual funds or ETFs. I can go into individual stocks and have that upside potential, but also you can go into more conservative investments as you work your way through school.

So really the only options either are a money market account or a bond fund, but bond funds still going to have volatility, especially in this type of environment. And I wouldn't want it necessarily invested in that bond fund while my child's going through school, really invested it all because you don't want to take that risk, especially if that's the money that's getting invested and just to throw it in the money market account.

Not really ideal either. So there are other investments. You clearly need some kids inside of these Coverdell Educational Savings Accounts where you obviously could not or maybe not obvious, but you can in the 529 plan because they don't have them in the 529 plan. So that is a huge benefit and difference to this particular type of account.

So while you're planning it doesn't matter if you use five 29 or ISA what the spend down is, but if you want more of that upside longer-term growth a little bit more aggressive in the ISA versus the 529 plan that you can use that towards the end of college, maybe the second, third, fourth year or even if you're looking at grad schools to use the Coverdale ISA and then use the five 29 plan a little bit earlier.

So take a look at the Coverdale Educational Savings Account. It does not aggregate with the 529 plan, so you can fully continue to fund your 529 plan, how you're doing it. And if you want to put some extra money in the ISA, you can. There are no contribution limits or combined contribution limits for that matter. So the 529 plan is to put a ton of money and you could basically fund your entire college with it whereas the ESA obviously it's a $2,000 limit that's per year, so go ahead and take advantage of it.

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