Learn more about CESAs: www.trustetc.com/self-directe...
We have some frequently asked questions that have been brought to us that we're going to talk about through this training. We're also going to show you how an investor here at Equity Trust Company is using his three children's Coverdell Education Savings Accounts to invest in real estate and do it all tax advantaged.
1. What is a CESA (Coverdell Education Savings Account)?
What does CESA stand for? Coverdell Education Savings Account, which is a savings vehicle for your children's K through 12 education or college tuition.
2. How does a self-directed CESA work?
Well, we can put money into the account, and then we have to find ways in which to grow the account in a tax-advantaged fashion. Now, many of our clients here at Equity Trust Company are primarily investing in alternative assets, beyond traditional stocks, bonds, and mutual funds.
Brian, in 2017 on just one real estate investment made $50,000 in his three children's CESAs. Here's how he did it. He found a vacant lot right outside of Nashville for $8,000. He bought it using his three children's CESAs.
CESA #1 put in $4,000 for the $8,000 investment, got 50% equity in the deal. CESA #2 put in $2,000 of the 8,000 for 25% equity, and then CESA #3 put in 2,000 for the remaining 25% equity.
All 3 CESAs were partnered on the deal. He sold the vacant lot just 60 days after purchasing it, to a real estate developer and he made $50,000 in net tax-free profit across those 3 Coverdell Education Savings Accounts. CESA #1 with 50% equity got 50% of the profits, which was $25,000. CESA #2 got 12,500, and CESA #3 got 12,500. That’s $50,000 that never hit Brian's 1040 as ordinary income.
3. What can a CESA be used for?
It can be used for just about anything that is recognized by the Department of Education through an accredited institution. What I'd encourage you to do to understand more about what it can be used for, go to either Internal Revenue Code 530, or IRS Publication 970.
But for all intents and purposes, think using the money for K through 12 education, not just for college tuition, and then of course for college tuition and other educational expenses. And it's pretty broadly encompassed.
Including general fees, room and board, tuition, books, equipment, software, anything again that is recognized by the Department of Education as a legitimate educational expense. The distributions, as long as they're being used for those educational expenses, are tax-free.
4. What are CESA contribution limits?
The contribution limit is $2,000 per year per child. One of the most common questions I get is, "Can I set up a CESA account for my child or grandchild and then have aunt or uncle set up a CESA account and mom and dad set up a CESA account and put in 2.000, 2,000, 2000?" It's the maximum $2,000 per year per child up until the age of 18. There are some exceptions to those rules for special needs children.
5. Are contributions to a CESA tax deductible?
No. Many folks will get 529 plans confused with CESAs. You make contributions after-tax, so you don't get the deduction. It grows tax-free through the investments that you're making, and then when you take the money out to use it for its intended purpose, which is for education, it's tax-free.
6. Are there income limits to associated with CESAs?
Yes - These are what's referred to as MAGI limits, meaning that if you make too much money, unfortunately you can't contribute to directly to a CESA. If you're single, in 2019, if you make between $95,000 Modified Adjusted Gross Income and $110,000, you can only make a partial contribution to a CESA account.
This is what's called the phase-out range. As you get closer to that 110, you can only put a small fraction of the full $2,000 allowable limit on an annual basis. Once you're over $110,000, unfortunately you can't contribute at all directly to a child or grandchild or other family member's Coverdell Education Savings Account.
And then if you're married filing jointly, those MAGI limits are between 190 and 220.
7. Is a 529 the same as a Coverdell Education Savings Account?
You can have both 529 and CESA account. 529s, typically you do get tax deductions for the contributions made to the plan, but you're restricted on the types of investments that you select. So with 529s, you can't invest in real estate.
Whereas with a CESA you can invest in just about anything, as long as you're following the rules and regulations associated with a self-directed retirement plan.
8. How do you open a CESA?
With Equity Trust Company, you can go online and start the process, or you can call us directly and one of our associates over the phone can help walk you through the paperwork to establish and fund the Coverdell Education Savings Account.
30 июл 2024
