College costs continue to soar. According to data from The College Board, tuition and fees alone now average $34,740 at private colleges, $9,970 for state residents at public colleges, and $25,620 for out-of-state residents attending public universities, just for the 2017-2018 school year just past. Plan on adding another $10,000 to $12,000 for housing for students who do not live at home through college. American families need every break they can get.
Congress knows this, however, and has come up with several programs to help ease the financial burden on families sending children for college. Among them are the Self-Directed CESA and the Section 529 plan. Both enable parents to save money for college costs on a tax-advantaged basis.
Each plan has important advantages and disadvantages:
|Self-Directed CESA||Section 529 Plan|
|Annual contribution limit: $2000 per contributor per beneficiary.||Limits vary by state but are generally much higher than Coverdell limits.|
|Contributions must be made before beneficiary’s 18th birthday.||Up to $15,000 in contributions per person per beneficiary exempt from gift tax consequences ($30,000 per beneficiary exempt for married couple donors).|
|Owners can self-direct (invest in alternative asset classes, real estate, gold, or nearly anything else).||Cannot self-direct, in practice. Owners must use one of the state-administered funds.|
|Contributions are after-tax.||Contributions are after-tax.|
|Assets in the account grow tax-deferred.||Assets in the account grow tax-deferred.|
|Tax-free withdrawals to pay qualified educational expenses.||Tax-free withdrawals to pay qualified educational expenses.|
|Can be used for elementary and secondary education expenses.||Can only be used for post-secondary education.|
|10 percent penalty on withdrawals in excess of qualified educational expenses per year.||10 percent penalty on withdrawals in excess of qualified educational expenses per year.|
|All assets must be spent by the time the beneficiary reaches age 30.||No age limits – beneficiary can be any age.|
|Annual income limit to contribute: $110,000 for singles, $220,000 for couples.||No annual income limits.|
|No formal prepaid tuition plans available.||Prepaid tuition plans available.|
|No state residency issues.||State residency is very important for pre-paid tuition plans.|
|No guarantees (unless investor purchases annuities within the Coverdell with guarantees as part of the contract).||Some states may guarantee minimum growth in prepaid tuition contracts, or guarantee that the accounts will cover tuition costs if fully funded each year according to state guidelines|
|10 Percent penalty is waived if student gets a full scholarship.|
As mentioned in the table above, while Section 529 plans limit you to the state-approved investments, there are no such limitations with a Self-Directed CESA. If you open a Self-Directed CESA with American IRA, LLC, you can invest your Coverdell contributions and earnings as you wish, in any combination of conventional and unconventional asset classes you choose. Some common options include the following:
- Real estate and REITS.
- Tax liens and investments.
- Private lending and mortgages.
- Gold and precious metals.
- Cash and money markets.
- Farms and ranches.
- Partnerships and LLCs.
- Closely-held corporations.
- Venture capital and private equity.
And much more.
Section 529 plans are potentially very beneficial thanks to their higher contribution limits and lack of income limitations. But many people like Self-Directed CESAs thanks to their utility in paying for elementary and secondary school expenses and supplies, such as laptops, etc.