Monday, September 14, 2009
Invest In An Education Savings Account
Tip #187 - Invest in Your Child’s Future With Education Savings Accounts (ESAs). Many people have heard about 529 plans to invest for their child’s education. And more than likely we have also all heard how poorly some of those plans performed over the past year. And even though these plans will probably gain back their losses by the time college rolls around, I am afraid that that may make some people scared to invest in their child’s education. And then when college or trade school time rolls around, there will be no money for the child. Enter the ESAs. An ESA is officially a Coverdell Education Savings Account, also known as an education IRA. A person can invest up to $2,000 per child in an ESA per year. While that certainly won’t be enough to pay for a person’s full college tuition, it is a great start to college savings.
The best part about an ESA, though, is that you control where you will be investing. If you are conservative and aren’t ready to invest in mutual funds, you can open a CD as an ESA. Or you can do a mutual fund, stock, a savings account or bonds. An added benefit is that the ESA grows tax-free as long as the money is used to cover your child’s education expenses. So if you want to start saving for your child’s college education but aren’t ready to make the leap to the 529 plans or you are worried about someone else having control of your investments, then start out with the ESA. You can invest it the way you want to. If after you have invested $2,000 per year per child you want to invest more then you can investigate the 529 plans or other options. Please not that there are some income limitations for being able to invest in an ESA, but they are fairly liberal.
If you don’t have much to invest or if you want to control where you are investing the ESA is a great option to begin investing for your child’s future. You have until April 15, 2010 to make the contribution for 2009. Please note that because of the way the law was set up, the contribution amount to the ESA may be lowered in 2010 to $500. Hopefully, the law will change by that point, but in the meantime why not make your contribution for 2009? I did another post a few months ago on ESA right here if you want more information.
In Real Life (IRL) - I love the Education Savings Accounts because I like having control of where I invest. I am not one who wants to hand my money to someone and have that person invest in the allocations they want or put money in investments I don’t understand. So for me, the Education Savings Account is a perfect investment vehicle. I have a mix of conservative and riskier investments that I have chosen – mainly some CDs and mutual funds. If the value goes down, the fault is just mine and not because I blindly handed my money to a financial advisor to invest for me. While I may not be as knowledgeable as a person who does finances for a living, I know what level of risk I am comfortable with and I have a good understanding of the investments I have chosen.
While $2,000 clearly isn’t enough money to fund my children’s college education, it is all we can afford to invest per year right now so it works out perfectly for us.