It is as though students and parents need an education on how to deal with paying for getting an education. The positive is that there is a method of avoiding the trap that more and more families are falling into when it comes to getting a college education.
A recent survey showed that the “average” college graduate from 2016 has student loan debt of $37,712. What makes this more alarming is that this figure is 6% higher than a similar study of 2015 graduates.
This is not a recent trend. More than 44,000,000 Americans reportedly have an outstanding student loan balance. Total combined student loan debt is now estimated to be at $1.4 trillion.
The ripple effect of this is having an impact on the economy. The percentage of people between the ages of 18 and 24 who continue to (or moved back with) live with their parents is now the highest it has been since 1940, toward the end of the post-depression era.
Our purpose in pointing this out is to make you aware of a tax-free way to pay or help pay for a college education. The right planning could help prevent you and your family from becoming a part of one of the above statistical categories over the next few years.
A Self-Directed Educational Savings Account IRA (ESA) is structured to provide tax benefits while being used strictly to fund education. Also known as a Coverdell Account, this is intended to be funded by parents or grandparents of a school aged child.
Although you, as the Account holder, pay appropriate taxes on the contributions to the Self-Directed CESA IRA, the earnings can grow tax free, and must be used for education.
While college is the most common usage, your Self-Directed CESA IRA can be used for tuition to elementary and secondary schools, whether public or private. (Please note that there are some private and vocational schools which are not eligible for CESA funding based on government criteria.)
In some cases, related expenses such as computers and supplies may be eligible as Self-Directed CESA IRA expenses.
Here is another important consideration. One Self-Directed CESA IRA could take care of each of the children, not just one. You can contribute up to $2,000 annually for each beneficiary. Thus, if you have four children to put through college, you could contribute anywhere from $0 to $8,000 every year if and as you can.
You are able to transfer funds to any family member (under the maximum age of 30) to be used strictly for these educational purposes. The amount transferred to eligible family members may vary, such as with students going to different universities and facing much different tuition costs.
Being aware of this opportunity years in advance of the college years brings you a huge advantage. It allows you more time to grow your contributions to the Self-Directed CESA IRA with a goal of eliminating the need for student loans. Even a 50% reduction in student debt makes a difference in the years that follow.
Operating your Self-Directed CESA IRA is very similar to operating a Self-Directed IRA. You can invest in real estate, precious metals, technology, business, or be a private money lender under appropriate conditions.
Although you are taxed on the amount of your annual contribution(s) to your Self-Directed CESA IRA, profits generated through investments made are not taxable.
For example, suppose you are able to purchase a property through the Self-Directed CESA IRA and then sell it two years later. The sale of the property results in a $50,000 profit for your CESA, which is not taxed. If you had also contributed $5,000 per year for the past five years, you would now have at least $75,000 available for school funding from your CESA.
Using this example, if you have a couple more years to go before the educational expenses begin, you could purchase another property and look to increase your return on that investment to also add to your funds.
Once you achieve the educational goals for your family, you can continue to do what you have already been doing in terms of annual contributions AND investing in real estate, precious metals, etc. to increase your funds tax free. The difference is that you start (or more actively grow) a Self-Directed IRA. You can keep growing those funds, without a restriction on the annual contribution amount, toward your retirement years.
Remember the statistic we reported in the second paragraph? Suppose you started and grew your ESA and it paid your child’s education in full. Now, you could show that child how to put that “average” $37,712 into their own Self-Directed IRA and grow it into six figures available to them when they retire.
We can help you to reach that statistic instead!