Comments on: College Savings Plans: 529 vs. Coverdell ESA

By: ~ Brent ~

~ Brent ~ — Thu, 05 Nov 2009 22:54:13 +0000

That has got to be one of the dumbest things I’ve ever heard. I’m going to hid a wad of cash from my kid, have them incur debt for 4-6 years – all the time collecting interest. Then come in and “save the day” and repay their school loans after the fact. All for the hope that it’ll curb their appetite for consumer debt. You have no insight into the mind of a 24yr old apparently. He or she will find a way to justify a $30,000 new car, $4,000 bedroom set, a plasma TV or whatever else they want because they’ll be able to afford the monthly payment and they “deserve it” after their hard life as a college kid.

You need to work with your kids when their young to instill that consumer debt can be dangerous. Set an example yourself by following the principles you want to instill in them. Find ways to reward them when they demonstrate the behaviors you want to foster – If they save $4,000 for a their first car, match them dollar for dollar (only if they pay for the car with cash). Give them a large allowance, but make them buy their own cloths, cell phone plan, gifts for their friends, ect – work with them to show them how to budget. This builds principles that hopefully will pull through the college years.

I’m sorry, I can’t find any logic in this strategy.

Good luck with that.

By: Ryan

Ryan — Mon, 31 Aug 2009 03:34:09 +0000

Yes, it is very possible to beat index funds, but the vast majority of people who sign up for educational accounts don’t have the ability or desire to manage a fund well enough to beat index funds.

For someone who is willing to put in the time and effort to maximize returns, then contributing up to the $2,000 limit for a Coverdell, then contributing to a 529 plan may be the best option.

By: Steve Williams

Steve Williams — Mon, 31 Aug 2009 03:26:30 +0000

Hi Mike:

You can cash them out. You will have to pay taxes on any gains as well as a 10% penalty on the total balance.

That’s one good reason to keep a portion of you investments for a child’s education in a standard brokerage account. Sure you would taxes every year, but you would have more investment options and total flexibility to do with it as you wish.

By: Steve Williams

Steve Williams — Mon, 31 Aug 2009 03:17:04 +0000

Hi Ryan:

Most 529 plans are a repackage of mutual funds that fund companies can’t sell. Considering your in low costs index funds that’s a good first step. But keep in mind you have limited flexibility of how often you can change your investments – so your 529 would of took a bath last year. With Coverdell you could of moved to a safer alternative. A savvy investor will consistently beat 529 plans returns. Considering Index funds for a Coverdell would defeat the purpose of the unlimited investment options.

The biggest drawback of a Coverdell is the contribution limit of $2000/year. If want to invest more than that amount I would recommend to max out your Coverdell first than go a 529.

If wish go to http://www.eistrading.com and click on subscription information and write “complimentary” copy on the referral line and send in the subscription form. They will send you a complimentary copy of “The Educational Investor” which deals with many types of investments. Their Coverdell is up 24% for the year.

Regards

Steve

By: Ryan

Ryan — Mon, 31 Aug 2009 02:42:54 +0000

Steve, I have my 529 plan in OH which features many low cost index funds run by Vangaurd, which are among the cheapest options available, and which many people would no doubt consider if they were using a Coverdell plan. Most states allow you to use their fund even if you are not a resident, so it is worth shopping around. Coverdell plans are also more limited in terms of how much you can contribute and plan portability. So you should consider your needs for both the fund(s) you choose and which college planning vehicle you choose. For some people the 529 is a better fit.

By: Steve

Steve — Mon, 31 Aug 2009 02:11:31 +0000

What’s often not dicussed is that most 529 plans consists of repackaged poor performing mutal funds that brokerage houses have limited inflows.

The Coverdell gives you total control of your investments. Do some research and buy some good stocks or mutuals funds. Your return on invesments should handly beat most 529 plans.

By: Ryan

Ryan — Thu, 09 Apr 2009 02:09:08 +0000

iu mike: I don’t have a definitive answer for you. I recommend contacting a CPA or other qualified professional. They should be able to give you an answer that will maximize your money and hopefully avoid the most taxes/penalties. Best of luck.

By: iu mike

iu mike — Sun, 05 Apr 2009 22:36:07 +0000

Any ideas what to do with 529 and ESA funds that will not be used for traditional academic expenses. My youngest daughter has elected to forego traditional college education and become a cosmetologist. This institute she is going to is not esa or 529 eligible and I have no one to roll this over to. I have heard that the principal can be taken out w/out tax or penalty; if the funds are lower than initial contributions can they be cashed out? no one seems to know