Types of Accounts: Tax Deferred (Non-IRA’s)

As mentioned in a previous post, most tax deferred accounts are IRA’s, however there a few accounts that are non IRA’s and are entitled to the same tax deferred benefits. Now that we have gone over all the types of IRA’s that are available to you for retirement, let’s turn our attention to accounts that can help you and your children (if you have any) in the near future. Let’s talk about an Education Savings Account (ESA). What are they? Just as IRA’s are designed to help you for retirement, ESA’s are designed to help you with your children’s educational costs. In fact, an ESA used to be called an Education IRA. There are 2 types of accounts that help you do this, a Coverdell and a 529 Plan. Both accounts are quite different, and I will explain their differences in my next post, but for now let’s stick to their similarities. Like IRA’s, any realized gains in these accounts are not taxed. However, when a distribution is made from a Coverdell or 529 Plan, if the funds are used for higher education expenses, the realized gains in the distribution will not be taxed. Well what qualifies as a “higher education expense?” The term higher education is referring to any education sought after High School. This can be at a College or University. The term expenses refers to any costs associated with higher education. This can include tuition, room & board, textbooks, school supplies (including lap-tops), and everything in between. If its school related, it will most likely qualify.

Money in both accounts is considered the owners and not the beneficiaries (the child). This is important because the money can always be taken back out for whatever reason, no questions asked. Additionally, contributions can be made by any party; they don’t have to be listed on the account or even directly related to the child. Furthermore, the account can be transferred to another beneficiary (considered a Rollover) without incurring taxes or penalties, but they must be a qualified family member. Consult your advisor or authorized dealer to determine who is considered qualified. Now that we have gone over their similarities, in my next post I will discuss how Coverdell’s and 529 Plan’s differ from one another.