Planning for your child’s education is one of a parent’s greatest concerns as an American – especially when it comes to higher education. The earlier you can start preparing, the better. Although your child’s high school graduation may seem many years away now, the high costs of university and college expenses are only growing higher. Establishing a financial plan now to provide for the future cost of school and college fees will decrease your burden down the road. But where do you start? For Americans and other expats in Japan, an education savings account may be just the place to give your child a head-start in life.
What Is an Education Savings Account?
An education savings account (ESA) is a tax-advantaged investment account that you can use to save money for your child’s future education. Parents or guardians can open an ESA account on behalf of a minor child who will be the account’s beneficiary.
The money in these accounts can only be used to pay for a child’s qualified education expenses (such as tuition, fees, books, supplies, and room and board). In the United States, there are two types of education savings accounts that are often recommended: Coverdell Education Savings Accounts and Custodial 529 Accounts. But first, why do you need one?
Why Should I Start Saving Now for My Child’s Education?
Education savings accounts in Japan are a great way to help cover the costs of your child’s education. By putting money into education savings accounts for your kids, you’ll be able to pay for college or vocational school tuition fees without having to worry about paying those bills at a later date.
Children of foreign people in Japan are more likely to study overseas (i.e. children of American expatriates in Japan are more likely to want to study in the U.S.). This means that they may not qualify for the same education loans to which “local” students have access. Many universities also charge higher tuition for non-local students, on top of the already-significant tuition costs:
- -An average of $25,707 of fees per year or $102,828 of fees over 4 years for a public university for in-state (local) students living on campus
- -An average of $43,421 per year or $173,684 over 4 years for out-of-state university students
- -An average of $54,501 per year or $218,004 over 4 years for private, non-profit university students
If you think you’ll be able to circumvent these costs by convincing your child to attend a Japanese university, think again. Japan accompanies the United States in the list of countries with the highest university costs, with average yearly expenses equal to:
- -¥820,000 per year for undergraduate studies at a national institution
- -¥930,000 per year at a local public institution
- -¥1,100,000 per year at a private institution
This is, of course, is not to mention expenses for extended studies (many students take more than four years to graduate from university in the United States) or post-graduate programs. All in all, the more you can prepare for these expenses ahead of time, the more financially secure you and your family will be no matter what educational choices your child makes. So, what are your best educational savings account options?
Coverdell Education Savings Account (CESA):
This is a savings account that can be used to cover qualified education expenses and offers tax-free growth. Distributions from a Coverdell ESA also remain tax-free as long as they go toward qualified education expenses.
There are annual contribution limits for Coverdell ESAs. Contributions to a Coverdell ESA can continue until the beneficiary reaches age 18, although distributions must cease by age 30. If there are still funds remaining in the account after that time, any remaining balance will be taxed as income and may also be subject to a 10% penalty unless another exception applies.
Custodial 529 Account:
This is a tax-advantaged investment account. Often sponsored by a state or educational institution, 529 savings plans encourage saving for future higher education expenses. Investment companies manage the accounts as contributions accumulate in a portfolio of mutual funds or exchange-traded funds.
The earnings on these investments are exempted from federal income tax. In some cases, they may also be protected from state income tax. 529 plans are often uniquely flexible, offering benefits such as allowing account holders to change the account’s beneficiary without incurring taxes or penalties.
Does Japan Offer Education Savings Accounts?
Education savings account options in Japan are limited, especially for those with limited Japanese ability. Fortunately, Americans in Japan still have American ESA options available to them. Contributing to an American ESA requires transferring your savings out of Japan and into an approved account domiciled in the United States. Such transfers can be tricky, especially with the taxation laws of two countries to take into consideration. As such, it’s a good idea to consult a U.S. registered investment advisor (RIA). A certified RIA can help you set up an account as well as determine the best way to transfer your money into it. Don’t leave your child’s education to chance – set them up for success by planning for their future expenses today.