What is an ESA (Education Savings Account) and How Does It Work?

What is an ESA (Education Savings Account) and How Does It Work?

When it comes to planning for your child’s education, the rising costs of tuition and school-related expenses can feel overwhelming. That’s where an Education Savings Account (ESA)—sometimes referred to as a Coverdell ESA—comes in. This tax-advantaged savings account offers a smart way to set money aside for your child’s education while benefiting from tax-free growth.

But how does an ESA work, and is it right for your family’s financial goals? Below, we break down the key facts about ESAs and explain why partnering with a financial advisor can help you maximize your education savings strategy.

How Does an ESA Work?

An ESA is a custodial account designed to help parents or guardians save for qualified education expenses. These expenses can range from elementary and secondary school costs to higher education expenses, including tuition, books, and supplies.

Key Features of an ESA:

1. Tax-Free Growth:
   Earnings in the ESA grow tax-free, meaning you won’t pay taxes on any investment gains, provided withdrawals are used for qualified education expenses.
2. Annual Contribution Limit:
   Contributions to an ESA are capped at $2,000 per year per beneficiary. This limit applies regardless of how many ESAs are opened for the same beneficiary.
3. Income Restrictions:
   ESAs have income eligibility limits. For single filers, the modified adjusted gross income (MAGI) limit is $110,000, and for joint filers, it’s $220,000. If your income exceeds these limits, you may not be eligible to contribute.
4. Broad Range of Investment Options:
   Unlike some other education savings plans, ESAs offer more flexibility in choosing investments. You can invest in individual stocks, bonds, mutual funds, and ETFs.
5. Qualified Expenses:
   ESA funds can be used for more than just college. They cover K-12 expenses such as private school tuition, tutoring, and even certain technology needs.
6. Usage Deadline:
   The funds in an ESA must be used by the beneficiary before they turn 30. If not, the remaining balance may be subject to taxes and penalties unless rolled over to another eligible family member.

Benefits of an ESA

• Versatility: Unlike 529 Plans, ESAs cover a broader range of educational expenses beyond just college tuition, making them ideal for families with younger children in private or specialized schools.
• Investment Control: With more investment options available, families have the opportunity to grow their education savings in line with their risk tolerance and financial goals.
• Tax Advantages: The potential for tax-free growth and withdrawals can significantly reduce the financial burden of education costs over time.

Is an ESA Right for You?

Deciding whether an ESA is the right fit depends on your financial goals, current income, and investment preferences. While ESAs offer incredible flexibility and tax advantages, they may not be the best option for everyone, especially those who want to contribute more than $2,000 annually or who exceed the income limits.

This is where working with a financial advisor can be invaluable. A financial advisor can assess your unique financial situation, help you navigate investment choices, and design a comprehensive education savings plan tailored to your needs.

Take Action: Meet with a Financial Advisor Today

Education is one of the greatest gifts you can give your child, and planning early can make all the difference. Whether you’re considering an ESA, a 529 Plan, or other investment strategies, consulting with a financial advisor ensures you’re making the smartest choices for your family’s future.

Ready to get started? Schedule a consultation today and take the first step toward securing your child’s education without sacrificing your financial goals.

 

Global View Capital Management (GVCM) is an affiliate of Global View Capital Advisors (GVCA). GVCM is a SEC Registered Investment Advisory firm headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262.650.1030. Ryan Peca is an Investment Adviser Representative (“Adviser”) with GVCM. Additional information can be found at www.adviserinfo.sec.gov Global View Capital Insurance Services (GVCI) is an affiliate of Global View Capital Advisors (GVCA). GVCI services offered through Experior Financial Group, ASH Brokerage, and/or PKS Financial. GVCI is headquartered at N14W23833 Stone Ridge Drive, Suite 350, Waukesha, WI 53188-1126. 262-650-1030. Ryan Peca is an Insurance Agent of GVCI.