Bitcoin and Your Kids’ Education
How a Coverdell ESA Can Help You Invest in BTC to Fund Their Education Tax-Free
Unlike most panelists at the WCI Conference, I do believe that crypto, particularly Bitcoin, has a bright future, despite its volatility and the speculative meme coins that compete with it (which I don’t believe in).
I believe that Bitcoin will become well-integrated into our financial system. My strategy to capitalize on its potential explosive growth over the next decade is to invest in Bitcoin ETFs like FBTC (Fidelity) or IBIT (BlackRock) to fund my children’s education. While there is skepticism and concern about Bitcoin going to zero, I believe it will follow a volatile but upward trajectory.
That said, I’m not a Bitcoin Maxi.
While I could open a custodial brokerage account to buy FBTC or IBIT, I’d rather do it in a tax-advantaged way.
Tax-Advantaged Ways to Fund My Children’s Education
There are two primary options:
529 Plan
Coverdell Education Savings Account (ESA)
Unfortunately, 529 plans, which are state-sponsored, do not currently offer investment options for Bitcoin ETFs like FBTC.
That leaves Coverdell ESA as an option, which I have an account for via Charles Schwab. I’ll focus on Coverdell ESA.
What Is a Coverdell ESA?
A Coverdell ESA is like the little brother of the 529 plan—both offer tax-advantaged ways to save for education, but there are several key differences, which I’ll elaborate on shortly.
The rules governing Coverdell ESAs are found in IRC §530 (right after §529), and it was previously called the “Education IRA.”
Key Features:
Acts like a Roth account – Similar to a 529 plan, contributions are made with after-tax money, grow tax-deferred, and withdrawals are tax-free if used for qualified education expenses (tuition, room, board, etc.).
Flexible investment options – Unlike a 529 plan, a Coverdell ESA functions like a brokerage account, allowing investments in stocks, ETFs (including FBTC and IBIT), and mutual funds.
Limitations of a Coverdell ESA
1. Income Limits (Major Issue for Physicians)
Married Filing Jointly (MFJ): Modified AGI must be below $220K, with a contribution phase-out beginning at $190K.
Single Filers: Modified AGI must be below $110K, with a contribution phase-out beginning at $95K.
Workaround: A grandparent who falls within the income limits can contribute to a Coverdell ESA as a birthday gift, which can be meaningful for both the grandchild and the grandparent. Alternatively, the child can contribute to their own Coverdell ESA.
2. Contribution Limits
The maximum annual contribution is $2,000 per beneficiary (child), across all accounts. A beneficiary can have multiple Coverdell ESA accounts.
Contributions can only be made until the child turns 18.
Funds must be withdrawn by age 30, unless the beneficiary has special needs.
If there is a remaining balance, it can be transferred to another family member of the beneficiary.
3. Penalties and Tax Implications
Overcontributions: If more than $2,000 is contributed, a 6% excise tax applies to the excess amount.
Unused Funds After Age 30: A 10% penalty applies if funds are still in the account after the beneficiary turns 30.
Investment Losses Are Not Deductible: If Bitcoin ETF investments crash, losses cannot be deducted on a personal tax return.
Non-Qualified Withdrawals: If funds are not used for qualified education expenses (e.g., buying a car), the growth portion of the withdrawal is subject to income tax to the beneficiary and a 10% penalty.
Final Thoughts
I believe Bitcoin is an alternative financial tool that will become integrated into our financial system. If you also believe in Bitcoin’s long-term potential and want to invest in a Bitcoin ETF, consider opening a Coverdell ESA to fund your children’s education tax-free.
While income limitations and contribution caps make it challenging for high-income earners, creative strategies—such as having a grandparent contribute—can help maximize this tax-advantaged opportunity.
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