Personal Investing -- Coverdell Education Savings Accounts -- Coverdell ESA -- An Alternative To The 529

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I'm starting a new series on investing that I can share with my extended family members, most of whom have Schwab accounts but little understanding about investing.

Anything I write here is meant only for my extended family members and no other readers. It is a starting point for discussion among the family members. Nothing is written in stone. These posts will be updated as conditions change. They will eventually be collected and linked under the "Personal Investing" tab at the top of the blog.

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Coverdell: An Alternative To The 529

There are some downsides to the "529" which I can discuss at another time. 

I still consider the "529" the best thing since sliced bread for folks like me and the extended family member to whom this is addressed.

However, as noted there are a couple of downsides to the "529."

The first question: can one have a "self-directed 529" just as one has a self-directed IRA?

No.

However. There is a way to accomplish the same thing as a "self-directed 529" if one was allowed to have self-directed 529s.

They are called Coverdell Education Savings Accounts. Link here.

There are many more restrictions on the Coverdale ESA than the "529." In addition, I've always felt uncomfortable with a Coverdell ESA for some reason. I don't know why. Well, it turns out that the law was changed in 2002 with regard to the Coverdell ESA and it appears to be an excellent option for saving for a child's college education.

Does Schwab offer Coverdell ESAs? Yes, of course. Link here.

Lots of restrictions. But they don't matter. 

Advice for the extended family member for which this investing series is directed: have a mix of 529s and Coverdell ESAs. 

I don't consider Covderdell ESAs an alternative to 529s, nor do I consider Coverdell ESAs an "alternative" to the 529. I consider them complementary, offering contributors and beneficiaries flexibility among other benefits.

So, again, have a mix of 529s and Coverdell ESAs. Or a very, very rich uncle. 

Speaking of which, we all have a rich uncle and ROTC scholarships are awesome. But I digress.

Some rules:

• income limit for the extended family member: around $190,000 (check latest IRS rules)
• contributions don't reduce your income taxes (same with Roth IRAs)
• any number of Coverdell ESAs for any beneficiary but total amount any beneficiary can receive in any tax year is $2,000
• therefore, with two children, under the age of 18, a mother and father can contribute up to $2,000 total for each child, no matter how many Coverdell ESAs they have

Item:

• with a mix of Coverdell ESAs and 529s, when a child goes to school, and starts paying for education, deplete the Coverdell ESAs first.

Links:

• IRS: Coverdell ESA;
• college education savings plans;
• Schwab and Coverdell ESAs;
• bypassing the $2,000 limit (not really, but sort of)