Lets assume that you would like to begin saving for your childrens education fund. At the end of each year, for the next 8 years, you will contribute $2,000 into a Coverdell Education Savings Account (Education IRA), using your after-tax dollars. The money grows tax-free, and neither the contribution nor the interest is taxed when you make a withdrawal, as long as you use it for education purposes. By the end of 17 years, your Education IRA will have accumulated to just over $86,000. Contrast this with your fully taxable non-IRA account which would have grown to only $50,000. That is a $36,000 difference! Today, the average 4-year cost of education at a public college in the country is around $38,000. In 18 years it is projected to be close to $86,000. Costs for private education are even higher. This example illustrates that, by funding your child's education using an Education IRA earning 14% with after-tax contributions of $2,000 in each of the first 8 years of your child's life, you can put an extra $36,000 into your child's future rather than Uncle Sam's pocket! There would be enough in the IRA account to pay for the entire projected 4-year education costs. Now, when your child begins their college education, as you draw from the account each year to pay for expenses, and re-invest the remaining funds, at the end of your child's 4th year of college, an extra $27,000 would remain in the IRA that can be transferred to another child's account. If you have a fully taxable Non-IRA account, you'd have to come out of pocket in your child's 3rd year of college because the account didn't have enough to cover the entire education cost. By using a Tax-Free Education IRA account, this allows the contributions to accumulate at a much fast rate than the fully taxable investment vehicle. |
