How to Save for Private School and Beyond

As a parent, you’ve got the future on your mind. You want the best for your child, and sometimes that means private school. Of course, that came come with a hefty price tag. Here’s everything you need to know about how to save for private school and beyond.

You likely already know that 529 plans allow you to save and invest money tax-free for college. Some states also give you a tax break incentive to contribute. But you may not be familiar with the Coverdell ESA.

What is an ESA?

The ESA is similar to the 529 plan in that you contribute after-tax money. It also grows tax free and is tax free on withdrawal if used for qualified educational expenses. Unlike the 529 account, you can purchase a computer with an ESA.

There are a few other key differences:

  • There is no federal or state tax deduction for contributing to one
  • The annual contribution limit is $2,000
  • The ESA can be used for private school (pre-college) and college and graduate school
  • There is a income limit to contribute to one: $110,000 single or $220,000 if filing a joint return*

The main reason to open is if you plan to send your kid(s) to private school. $2,000 a year does not sound like much. but if you start early and let compound interest do its magic,you might be surprised:

By the time your kiddo enters high school, you’ll have a decent amount saved (depending on where you are – this may pay for 1 year of private high school in NYC …).

What about the income limit? There is a backdoor way of course. You won’t be able to open one up yourself but your kiddo can!

How to do a Backdoor ESA to Save for Private School

You gift the money to your child usually through a UTMA account. The $2,000 counts towards the annual gift tax limits, so keep that in mind when you’re also funding a 529.

In any given year, the beneficiary can only receive $2,000 a year towards an ESA. So unfortunately, Grandma can’t open one for your kiddo and contribute an additional $2,000 annually.

Also, the money must be used by the time the beneficiary turns age 30. A tip is that the money can be rolled over to another beneficiary within the same family. So if you wanted more money for your kiddo over the $2,000 annual limit, you could fund another family member’s ESA (they must younger than 30) and then roll it over in the future.

Where should you open a Coverdell ESA? As with any investment account, you want to minimize account and trade fees and have flexibility with how to invest the money.

At this time, I recommend etrade and TDA for no account fees and low to no cost trade fees to help you start to save for private school.

Final Thoughts on How to Save for Private School and Beyond

Using a combination of a 529 savings plan and a Coverdell ESA can help make the costs of private school, college, and beyond a bit more manageable. While it might not seem like enough, the earlier you start, the better. In fact, you can even open a 529 before your child is born. By taking the first step outlined here on the Backdoor Coverdell ESA, you can let compounding help you save for private school starting today!

Do you have an ESA? Comment below!]]>

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8 Comments

  1. Annette A. on August 28, 2017 at 11:02 am

    I had no idea this existed. As a mom considering independent/private schools for my kids, this is Oh-So helpful! Thank you for spreading the knowledge!



    • Miss Bonnie MD on August 28, 2017 at 5:43 pm

      Yes, so many people don’t know. Not a ton you can contribute, but if you start early, def helpful!



  2. christymmd on September 5, 2017 at 4:06 pm

    Saving for our kids’ educations via 529s has been wonderful for us. Another nice thing is that if one child doesn’t use all of the money, it can be used by a sibling or by the child’s future children.



    • Miss Bonnie MD on September 6, 2017 at 8:25 am

      Yes! I see lots of folks worried about “overfunding” and then having to pay penalty fees to withdraw the money. My stance is that you should be funding a 529 with money you don’t need in the first place (i.e. make sure you family’s future is otherwise secure first). So there should be no issue in gifting the fund to another family member – sibling or grandchild.



  3. Westcoaster on September 15, 2017 at 6:26 am

    Interesting but probably not worth it to most high income investors. Why not max out the 529 for 5-7 years, then contribute 5k/yr for the rest and cash-flow the private school expenses.
    Any 529 funds not used can be rolled over to another child or… worst case scenario, you end up enrolling in art school on the Big Island for 2 months per year in retirement.



    • Miss Bonnie MD on September 15, 2017 at 9:31 pm

      The ESA is 2K a year compounded that grows tax free is worth it…why wouldn’t you do this? Unless it’s “too late” and you only discovered this when your kiddo is older so won’t have time to compound. I’m due in about 1 month, and will start an ESA this year. And if kiddo doesn’t go to private school, it’s basically a 529 then.



  4. Jay Mukherjree on March 4, 2018 at 11:14 pm

    Thanks for the info. How do i transfer the money through UTMA account.



    • Miss Bonnie MD on March 5, 2018 at 1:43 pm

      I have not done it yet, but we plan to do it via TDA



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