Education savings accounts (ESAs) help K-12 parents pay for educational expenses such as tuition, tutoring, online education, therapies for students with special needs, textbooks and other expenses.
EdChoice.org says 28% of parents spend the money on multiple learning services. There are 13 states with ESA programs, including Arizona, Arkansas, Florida, Indiana, Iowa, Mississippi, Montana, New Hampshire, North Carolina, South Carolina, Tennessee, Utah and West Virginia. The site says more than 300,000 recipients have accounts in the system, with Florida having the most at 136,000 enrollees for 2023-2024.
Types of savings plans
There are several types of ESAs, including 529 college savings plans, Coverdell accounts and custodial accounts. States sponsor 529 plans, which allow savings to grow on a tax-free basis and allow for tax-free distributions. Coverdell accounts have many of the same benefits, but come with income and contribution caps. Custodial accounts transfer to the dependent they’re intended for once they reach a certain age.
There are some limitations to these accounts. For those with 529 plans, there are limitations on how the money can be spent or transferred, and there may be fees for maintaining the account.
Taxes or penalties may apply if the money isn’t used for eligible expenses. Coverdell accounts come with income caps and contribution caps, and there may be fees associated with the account. It only applies to certain kinds of expenses, and ineligible expenses may incur taxes and fees. Custodial accounts have contribution caps and fees, and taxes may apply to withdrawals.
Alternative plans
If your state doesn’t offer an ESA or these options don’t make sense for you financially, there are alternatives. These include highyield savings accounts, where you open an account and begin saving with no income limits or contribution caps, but with no tax benefits.
Roth IRAs can be used to save for education expenses on an after-tax basis. Roth IRA owners can withdraw their contributions (but not their earnings) at any time without penalty. There are income and contribution caps, however.
Brokerage accounts can help families save to pay for educational expenses. These accounts allow investments regardless of income and there are no contribution limits. However, capital gains taxes may apply to withdrawals and there are no up-front tax advantages.
