Hello Habesha Finance family! As some of you know we were on break last week as my wife and I welcomed our first child into this world. And as I continue to look at this precious creation, I can’t help but think of the future. A lot of what I ponder about are the educational opportunities that will be available to our child and how we will be able to support it. Let’s face it, most of us parents see our children and expect that they will all get scholarships and grants that will get them through their years of college. And I hope this will be the case for all of us, but as parents we have to be prepared in the event it does not. The last thing I want you or your children to do is to borrow and take unnecessary loans to pay for education. I say this, because I financed my way through college with loans and that was one of my biggest regrets during college. So, for this week’s blog I am going to go over two different ways you can save for your child’s education which are the Coverdell ESA (Educational Savings Account) Plan and 529 Plan (named after Section 529 of the Internal Revenue Code).

Let’s start with the Coverdell ESA, which is what I recommend you use for your child or children when it comes to saving for education from kindergarten to college. The late Senator Paul Coverdell was the man behind this awesome savings tool for education. This plan allows families to invest up to $2,000 per child per year until the child reaches the age of 18. There are income restrictions and according to Investment Company Institute, “Contributions can be made by individuals with modified adjusted gross income of less than $110,000. For a couple filing a joint return, that amount is $220,000.” So an ESA only works if your family falls under one of the two categories above. If your income does not qualify you for an ESA account for your child you can still invest in a 529 plan, which is another great education savings tool that we will discuss below. It is also important to note that a Coverdell ESA must be distributed when “the beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary.”

One of the great attributes of the Coverdell ESA is that you can control what your money is invested in so that way you maximize your child’s educational fund. Also, unlike a 529 plan the Coverdell ESA can be used to help pay for certain expenses for elementary and secondary education. Pretty cool, right? This means for the first years of your child’s life you will have potentially $10,000 plus any growth that account has gained before the first day of kindergarten. So what do you do if your household income is too high for this option? Well, let’s see…

The 529 Plan is another great savings tool for your child’s education. According to the U.S. Securities and Exchange Commission, “A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.” Remember how I mentioned you have control over what your ESA plan is invested in? Yeah, the 529 plans do not let you do that and you can only use 529 funds for college expenses, but there are other benefits to the 529 plans which I will try to explain here. Also, there will be links to help explain the 529 plans.

A 529 plan does not have any contribution limits or income limits, which is great for all families who want to put as much money into their child’s account as possible. In addition to, a 529 plan does not have an age limit, unlike the ESA Coverdell that has to be used before the child turns 30.

As I am beginning to join many of you on this journey called parenthood, let me express the importance and responsibility we all have of preparing our children for their futures spiritually, educationally, professionally and financially. I understand some of you may not be interested in using an investment vehicle as a means to save for your child’s future education. I will still encourage you to put money aside in a separate bank account that will be used for your children’s education. If you can save $200/mo for 18 years for one child, that’s about $43,000! Even with inflation I imagine that would help your little one get through 4 years of a state college easily without any scholarships or grants. Whatever you decide, DECIDE NOW! Saving and/or investing for your children’s education depends on what you do today.

Here is a list of some decent ESA providers that you can start an account with: Coverdell ESA Providers. And here is an easy way to search different 529 plans to get started with one: 529 Plans State by State.