Pay tuition with tax-free money?!?!?!

amother

Bisque

Thu, Jul 21 2016, 7:08 pm

So I just found out about Educational Savings Accounts and I can't believe I've never heard of this before. Basically it works just like a 529 plan except the money can be used for elementary school and high school in addition to college. You invest money after taxes, and any earnings on those investments can be used for school, tax-free!

What's the catch??? And why aren't frum people all over this? (Or are they?) If I start investing now when my kids are young, I'll be able to spend the earnings, tax-free, on elementary and high school tuition?

Does anyone have any experience with this?

amother

Hotpink

Thu, Jul 28 2016, 1:22 pm

This is not a deep secret. It is not tax free money-you put the money in post tax. The earnings are tax free.
"The total contributions for the beneficiary of this account cannot exceed $2,000 in any year, no matter how many accounts have been established.
Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI for the year is less than $110,000.
For individuals filing joint returns, that amount is $220,000."
Each kid can only get $2K/year. This is a drop in the bucket compared to many people's tuitions.
There was a period of time that ESA could not be used for elementary/high school. I see now that it can be.
We had ESA money for one kid that we established when the kid was in pre-school. Finally using it to pay a tiny bit of her college expenses.

amother

Bisque

Thu, Jul 28 2016, 1:29 pm

amother wrote:

A response! Thanks.

Yes 2000 is low. But that number is how much can be added to the account per year. I don't think there's a limit to how much can be taken out? Assuming you can afford the 2000 to add every year, starting from when your child is 3, by the time she's 14 you have 22,000+11 years worth of compounded interest to pay the exorbitant high school tuition.

I see you wrote you had an ESA account - so you don't think it's worth it?

Goldie613

Thu, Jul 28 2016, 2:09 pm

amother wrote:

Catchier title...maybe now I'll get some responses...unless literally no one has heard about this...

I certainly haven't! What state is this in? Or is it a federal thing?

If it's true I'm surprised the schools aren't telling parents about it...

amother

Hotpink

Thu, Jul 28 2016, 2:19 pm

We used this vehicle only for a small amount of money. During the long years when my husband was a medical resident, we still felt we should have some sort of college savings plan for the kids. Hence the ESAs, called Coverdells back then. Once we could actually afford to really put away for education, we B"H had maxxed out of the income limits.

It is not a bad vehicle at all, just has its limitations.

amother

Bisque

Tue, Aug 02 2016, 1:01 pm

amother wrote:

Thanks! I'm wondering about the income limits - what happens when you max out? Does that mean you can't contribute but you can still withdraw with no taxes? Or do you lose all tax benefits?

amother

Hotpink

Tue, Aug 02 2016, 1:37 pm

If you max out on the income eligibility, you may no longer contribute to an ESA.
However, the money in the ESA can continue to grow until you withdraw it.
If it is for a qualified expense, then you don't pay taxes on the withdrawal.

amother

Bisque

Tue, Aug 02 2016, 1:39 pm

Goldie613 wrote:

I certainly haven't! What state is this in? Or is it a federal thing?

If it's true I'm surprised the schools aren't telling parents about it...

Lol I'm sure the schools would rather that parents pay them the extra $2000 a year instead...

amother

Bisque

Tue, Aug 02 2016, 1:40 pm

amother wrote:

Thank you!

amother

Bisque

Wed, Aug 10 2016, 2:39 pm

amother wrote:

So basically, you can put away $2000/ kid? So if I have 5 children I can put away $10,000 and it earns interest tax free? Am I understanding this properly?

If you are eligible for the income requirements, you can put away $2000 per kid per year and the interest earned is tax free as long as it's used on tuition, school supplies or other eligible school expenses.

shatzileh

Fri, Aug 12 2016, 3:04 pm

So we're saying you can put in max $2k a year, and the interest is tax free? Let's say you've got a great rate of return these days at 10% so you're making $200. (I'm being very generous with rate of return). Assuming tax rate of 30%, you're saving $60 a year. Is it worth locking up $2000 a year to save $60 a year? If you like the sound of that, go for it. I'd investigate what their return rates really are.