Ok…so the real name of an IRA that can be used for education expenses is called a Coverdell Education Savings Account (Coverdell ESA). However, for simplicity sake, we in the accounting world generally refer to these powerful little gems as the “Education IRA”.
Regrettably, not everyone in the accounting world believes the Education IRA to be a precious gem. Mostly because they don’t understand their hidden benefit and strategy. Thus, in my opinion, the 529 college savings plans are oversold to the public and no one really talks about the Education IRA.
Let me set the record straight and share what I think to be one of the most incredible ways to save for college education. First, the good news:
The Hidden Strategy. The little known fact that can transform your college savings account/Coverdell ESA/Education IRA into a powerhouse for college savings is the fact you can self-direct the investments. Hence, you can use leverage and sometimes make a small investment that can pay enormous returns and in turn accelerate your college savings account very quickly.
What is a Qualified Education Expenses? Essentially, this term means tuition, fees, books, supplies and equipment required for study at any accredited college, university or vocational school in the United States and at some foreign universities. However, the money can also be used for room and board, as long as the fund beneficiary is at least a half-time student. Off-campus housing costs are covered up to the allowance for room and board that the college includes in its cost of attendance for federal financial-aid purposes.
In summary, many a parent understands the seriousness and stress ‘college savings’ can place on a family. However, just as a retirement savings plan, the best strategy is to just start saving now, and in my opinion, start self-directing your Education IRA as soon as possible to reap the highest possible rates of returns. As a parent with 3 kids in college this year, let me encourage you to take this seriously and just get started with something and don’t give up.
The NEBDG Blog, by our Tax & Legal instructor Mark J. Kohler, is "The Real Estate Investment Conversation You Can Rely On." Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the books “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com. Let us know if there is a topic you would like to discuss!