Saving to an Education Savings Account
By: Karen Rinehart, CFP^®
The Henssler Financial Group Position Paper

If your income is under $95,000 for single filers ($190,000 for married filing jointly), an Education Savings Account (ESA), formerly known as an Education IRA, is a great way to save for your child's education. A partial contribution can be made for single filers with income under $110,000 ($220,000 for married filing jointly). The annual contribution limit is $2,000, making an ESA a viable option for college saving. The younger the child is when you begin to save, the better. If you cannot save more than $2,000 per year for college, The Henssler Financial Group suggests primarily using an ESA. If you can save more than $2,000 per year, you should first save to an ESA and make remaining contributions to a 529 Plan. The following illustrates how much the $2,000 contributions can grow by the time your child begins college. We have assumed that the cost of a four-year public university is $15,000 per year (in 2005), increasing each year by 5%.

Newborn:
If you currently have a newborn child, we estimate it will cost approximately $159,434 to fund four years of higher education at a state university in 2025, approximately $40,000 per year. If you invest $2,000 per year in an ESA and earn 10% per year on the account, the account should grow to approximately $100,318, which should cover a good portion of the cost of college for your child.

5-Year-Old:
If you currently have a 5-year-old child, we estimate it will cost approximately $124,921 to pay for four years of higher education at a state university if he begins college in 2020, approximately $31,230 per year. If you invest $2,000 annually in an ESA earning 10%, you should have approximately $53,949 by the time the child attends college, which will cover approximately two years of education costs.

10-Year-Old:
If you currently have a 10-year-old child, when he starts college in 2015, the estimated cost for a state university will be $97,880, approximately $24,500 per year. If you invest $2,000 per year in an ESA and earn 10% per year on your investment you should have $25,159 when your child starts college, which should cover the first two years of college.

15-Year-Old:
We estimate that it will cost approximately $76,691 to send a 15-year-old to a state university for four years if the child begins college in 2010, approximately $19,000 per year. If you invest $2,000 per year in an ESA and earn 10% per year on your investment, you should have $7,282 when your child starts college, which should cover the first year of college.

The longer you have to save to an ESA, the more attractive these accounts become. Education Savings Accounts are self-directed accounts, meaning that you control the investments. If you plan to cover the entire cost of college for your child, you most likely will need to save more than $2,000 per year for their education. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.