Dear Rick:

My wife and I just had our first child.  After reading a number of your articles we started a Michigan Education Savings account for our child and have encouraged our friends and relatives, as opposed to buying baby gifts, to make a contribution to their education account.  In addition, my wife and I have bought more life insurance and we took your suggestion and bought term.  We each bought a 30-year term policy.  My question to you deals with private schools.  My wife and I are not planning to send our child to public schools; rather, we plan to send him to a private school.  My question is:  Is there a way I can use my Michigan Education Savings Plan for elementary or high school?  If not, is there another type of program I can use?  Also, is there anything else you think my wife and I should do?

Thanks

Bob

Dear Bob:

First, congratulations on the birth of your child.  I also want to congratulate you for putting so much thought into your child’s future.  The fact that you’ve already  established a college savings plan says a lot about you and your wife.

In answering your first question, the answer is no.   The Michigan Education Savings Plan is known as a 529 Plan and the purpose of those plans are post-high school education.  To be able to withdraw money on a tax-free basis from a 529 Plan, the money has to be used for post-high school education expenses.  Therefore, your Michigan Education Savings account is not the appropriate vehicle to save for a private elementary or high school educational expenses.  The vehicle for that is what is known as a Coverdale Education Savings account.

A Coverdale Education Savings account has been around for years, but they are not as popular as 529 Plans. They offer many of the same benefits of a 529 Plan in the fact that the money grows tax deferred and if it is withdrawn for qualified education expenses, the withdrawals are tax free.  The one benefit that the Coverdale offers that the 529 Plan does not is the fact that you can use this money for primary or secondary education.  Therefore, for parents who know they’re going to send their children to private elementary or high school, this is an excellent vehicle to use.

Unlike a 529 Plan where virtually you can put unlimited amounts of money into the account, the Coverdale is very limited.  The maximum contribution per child, per year is $2,000.  That doesn’t mean that each grandparent can put in $2,000, what that means is that the total contribution per child is only $2,000.  In addition, unlike in a 529 Plan where there are no income limitations, there are with Coverdale accounts.  If you file your returns jointly, in order to make a full contribution into a Coverdale, your modified adjusted gross income must be less than $190,000.  The contribution is phased out between $190,000 and $220,000.  If you are single, your modified adjusted gross income must be less than $95,000 to make a full contribution.  If you make more than $110,000 you cannot contribute.

There is another difference with Coverdale versus 529 and that is how you invest the money.  In a 529 Plan there are typically set portfolios which you choose from; that is not the case with a Coverdale.  In a Coverdale you are not limited to set portfolios, you virtually can invest in any investment you choose.  Most of the brokerage houses such as Fidelity, Schwab, T. Rowe Price and Vanguard all offer Coverdale IRAs.

For those parents who know their children will go to private high school or elementary school, a Coverdale IRA is an excellent investment vehicle.  In addition, there are no rules that say you cannot have both a Coverdale and a 529 and you can contribute to both of them annually.

One last note is, and I do believe there is something that you and your wife should do, and that is a will.  If, God forbid, something happens to you and your wife, the question is who raises your child.  The last thing you want is a legal fight over guardianship of your child.  Therefore, at a minimum you and your wife need to do a will.  In that regard, you don’t have to necessarily visit an attorney, you can do a simple will for free.  There’s a free fill-in-the-blank will known as the Michigan Statutory Will which you can get from many places including my website.

Once again, congratulations on the new addition to your family, and congratulations for having the forethought to think about his future education.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com