ESA Contribution Limits 2021

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Saving for higher education can seem like a daunting task. Many parents operate under the misconception that they need to cover 100% of their child’s college expenses, causing unnecessary stress. The reality is that most people utilize a number of different methods to pay for college — scholarships, financial aid, and  savings.

Education Savings Accounts, or ESAs, offer parents a way to save for their child’s education much faster than they could by simply setting aside a little bit of money from every paycheck. There are many different types of ESAs, each with its own sets of education savings account income limits, rules, and regulations. Determining the right path for your child will depend on what your needs and goals are, and what strategies you choose to employ. 

What is an ESA?

An Education Savings Account (ESA) is an investment vehicle that allows the beneficiary to build up tax-deferred savings for college. Although, it is also possible to use the funds for K-12 expenses as well. 

Types of ESAs

There are a few different types of ESAs. For our purposes, we’ll stick to the most well-known. 

Coverdell Accounts

Coverdell Education Savings Accounts are available to any student under the age of 18. They are tax-advantaged accounts, that allow a student to save for upcoming educational expenses through investments.

Anyone can contribute to a Coverdell ESA — including the beneficiary. Corporations and trusts are also able to contribute to a Coverdell ESA. The ESA contribution limits for Coverdell ESAs are capped at $2,000 per student per year. If more than one account has been opened for a student, it is important to keep track of the ESA contributions so that you may avoid fines and penalties for going over the ESA limits. Contributors must contribute by the due date of their tax return (not including extensions).

After modified adjusted gross income, educational savings account income limits are capped at $110,000 for individuals and $220,000 for married couples filing jointly.

One aspect of Coverdell ESAs that some find appealing is that they are self-directed. If you are more of a hands-on investor, a Coverdell ESA might be something to consider.

529 Plans

529s — like Coverdell ESAs — are tax-advantaged savings accounts that allow tax-free growth, provided the funds are used to pay for qualified education expenses.

The contribution limit for a 529 plan is at $16,000 per donor — up from 2021’s limit of $15,000. However, different states have different caps for 529 plans. For instance, Georgia has a cap of $235,000, whereas California’s is capped at $475,000. Currently, there are no income restrictions on 529 plans and no 529 plans are self-directed.

Contributions to a 529 plan are not tax deductible at the federal level, but some states offer state income tax deduction or credit for 529 plan contributions. Most states have a December 31st deadline, but some states have deadlines in April. We recommend checking with your 529 plan or applicable state to determine eligibility.

Custodial accounts

Custodial accounts are very different from the aforementioned ESAs. There are some pros and cons to consider. A custodial account allows you to take advantage of the gift tax exclusion while maintaining control over the account and guiding your child’s investments.

Custodial accounts are not subject to the rules and regulations of 529s or Coverdell ESAs, where the funds must be spent on education-specific expenses. Once the beneficiary turns 18, 21, or 25 — this varies by state — the money is theirs to do with as they please. While you and your son or daughter might have discussed putting the money towards tuition, if they feel like spending it on throwing the world’s largest house party, they are legally allowed to do so.

Custodial accounts don’t come with contribution limits, however, contributing more than $15,000 as an individual or $30,000 as a couple ($16,000 and $32,000 respectively in 2022) might trigger a gift tax. This tax would be the responsibility of the donor, not the beneficiary. Unlimited contributions to a custodial account can be made once the account is open.

Many people use custodial accounts to supplement their 529 or Coverdell plans, instead of relying on an 18-year-old to make a mature decision.

What expenses qualify for coverage with an ESA?

ESA, 529, and custodial account qualified education expenses include books, tuition, fees, room and board, miscellaneous supplies, uniforms, tutoring, computers, internet, and many others. Beneficiaries with special needs may also have their equipment and services covered.

As mentioned above, custodial accounts can be spent on anything and are not subject to ESA rules and regulations.

Should I self-direct my ESA?

Although you can self-direct an ESA the amount of money that you can contribute annually limits you to smaller investments. However, you can always partner with an ESA giving you more investment freedom and the potential to grow the ESA much faster than the annual income amounts.

What can IRAR do for you?

IRAR Trust Company is dedicated to helping IRA investors achieve all of their retirement goals by providing comprehensive education and investment strategies available to them. 

Our knowledgeable staff of self-directed IRA professionals takes pride in helping our clients expand their financial literacy. We believe that there is no such thing as having too much information.

If you are ready to take the next step toward planning your retirement future, contact us for your free consultation.

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