Funding College is a significant expense for US citizens and many want to see their loved ones go to get the education they want or need! Tuition in the U.S has increased by over 6% a year for the last 10 years. Well over the average CPI growth in the U.S. This is why I want to go over some education savings plans for US expats.
Unless you are fortunate enough to get a scholarship, proper planning is needed. This article will go over some of the main U.S college saving plans, including 529 plans, Coverdell education plans. As well as challenges faced by U.S expats.
529 Savings Plans
529 saving plans allow investors, to make contributions to education costs. These are state-specific, although expats have no specific state. You can still contribute, to 529 plans as there are no state residency restrictions on 529 plans.
Although, contributions to 529 plans are not tax-deductible, and are made with after-tax dollars.
The growth is tax-free until the education cost is paid. Contributions can be made by anyone, not just a direct relative.
Tax-free distributions are used if used to fund “qualified” higher education expenses. These cover tuition fees, and material costs such as textbooks.
One point, 529 accounts (until recently) were limited to Universities in the U.S. Now, K-12 tuition only can be covered, by 529 plans.
If funds are withdrawn, for non-qualified expenses then will be subject to your income tax and 10% penalty.
The advantages of 529 plans are that when you contribute, they are not subject to the gift tax. Also, having the flexibility the investment option of the plans.
Also, if the beneficiary doesn’t attend university or use the qualified distribution it can be passed on to another beneficiary.
If an individual expat is not subject to state taxes, then state tax benefits which create an incentive to use the home state plan are not relevant. Therefore using a better plan such as Ohio and Utah, is feasible for U.S expats.
Coverdell Education Savings Accounts
Other saving accounts, are Coverdell education saving accounts. These allow for yearly, amounts of up to $2000 are allowed for any child under the age of 18.
Anyone can contribute, although, this is subject to income amounts, of $190,000 for joint holders and $95,000 a year for singles. These are possible to open even if they are not in the U.S.
Coverdell, are not tax-deductible, but gains and income are tax-free. Distributions are tax-free if they are used for qualified education expenses. These can be used for a wider range of education expenses than 529.
Also, if the distributions are not used for educations plan they must be withdrawn at age 30, subject to income tax and a penalty. Although, they can be transferred to another person plan tax-free if under 30.
College Saving Options Through Traditional Investment Accounts
Other options for saving for your child’s education, you can opt for low-cost broker accounts, IBKR is one, the other we at IFE use is with BNY Mellon that cost 0.2%.
Again, with any U.S expats make sure that your funds are not subject to PFICs. So, investing in accounts back in the U.S rather than the country where they are presently residing might be a better option.
IRA/Roth IRA money can be taken out of IRA/Roth IRA without the 10% penalty, for withdrawals before 59.5, to pay college costs. Although, are still subject to income tax.
Considerations for the American Expats
None of the education plans has tax treaties with the U.S for education plans so it could be a counterproductive way to save, as the plans, might not be regionalized. Therefore subject to local tax.
If you are somewhere like the U.K., you have options such as a Junior ISA and it is worth looking up the country where you as they might have specific education plans.
If you are looking to save for education as a U.S expat, please get in touch as I can offer a free 15-minute review for U.S expats, please email info@investmentsforexpats.com
