Why Choose the ESA?
Jimmy asks why Dave recommends an Education Savings Account (ESA) versus a 529. Dave recommends checking with an ELP to find an ESA and explains why he recommends them.
QUESTION: Jimmy in Grand Rapids, Michigan, asks why Dave recommends an Education Savings Account (ESA) versus a 529. He opened an ESA for his first child but hasn’t been able to find one for his second child. Dave recommends checking with an ELP to find an ESA and explains why he recommends them.
ANSWER: The main reason I do the first $2,000 a year into the Education Savings Account is it means only one thing. There’s only one type. You put money in there. It grows tax free for kids’ college. It’s that simple, and I recommend a good growth stock mutual fund that’s got a long track record.
The 529 means a whole bunch of different things, and most of them are bad. There’s only one good one, and I’m not a fan of prepaid—it’s a prepaid college plan with your state. I would never do that because I don’t trust your state to manage money well. I really don’t trust your state to manage money well. Michigan. Think about it, okay?
When you look around, the states by and large aren’t run as well as your household and certainly aren’t run as well as my business. I’m not going to put my money with them for my kids’ future. I want to control the investment environment more than that. It is my duty, so I don’t want to do prepaid college with them.
A 529 plan that locks you into a certain kind of investment or takes over the throttle and decides when it’s going to move from investment to investment based on the age of the kid—a life phase-type plan—I don’t like those. There’s only one kind of 529 I like, and it looks just like the ESA. You put the money into a good mutual fund inside the 529, and if you don’t like it, you can move it to another mutual fund inside the 529. You’re controlling the future, and you’re controlling the destiny.
The good news about the 529 is it’s not limited to $2,000, so if you want to put more than $2,000 in, you search out that type of 529. For instance, maybe you got a lump sum. Grandma passed away and left you $10,000 for your kids’ college. Well, you can’t put all of that into an ESA in one year. You’d have to $2,000 for five years. If you put it into a 529, you could put it all in one year. That’s the nice thing—the one thing I like—about the 529, but the problem is stuff that I say gets edited and people pick up portions of what I say, and then they go running hog wild off and say, “Dave Ramsey said this,” and all that. When I don’t have the time like I’ve had with you to explain the whole side—all the parts of 529s that are bad—only the sliver of good, it’s easier for me to just say hey, the ESA—you really can’t screw that one up if you put it in a good mutual fund.
If you make over $200,000 a year, yeah, you’re an evil rich person. You must be punished. The tax law will do that for you. You are income-limited there. If that’s the case, the 529 is the way to go. However, to properly fund the 529, you can go through one of our Endorsed Local Providers if you’d like. That’s an option as well.