A Coverdell Educational Savings Account (ESA) is a great way to save for your child’s college education because they offer great tax savings and you control how and where you invest your contributions. This is in contrast to a 529 college savings plan, in which investment options are limited to the options available in your state, or at the university in which you purchase the college savings plan.
Comparing Coverdell ESAs and 529 College Savings Plans. Before opening a Coverdell ESA account it is a good idea to investigate your options. Here is a 529 College Savings Plan and Coverdell ESA comparison, which can help you decide which college savings plan is best for your needs.
How to open a Coverdell ESA plan
Coverdell ESA plans can be opened at almost any brokerage firm or bank. You will need the SSN of the beneficiary to open the account as well as other personal information, including name, date of birth, address, and possibly other information, depending on where you open the account.
Coverdell ESA contributions can be invested in a wide range of investments, so the best course of action is to determine the type of investment that is appropriate for your needs, then find a broker, bank, or investment firm that can help you meet those needs. You will want to look at things such as:
- Fees. You want to minimize investment transaction fees, custodial fees, annual fees, or other fees
- Investment options. Do they offer mutual funds, index funds, stocks, bonds, CDs, etc.?
- Other account features. Can you link your account to a savings account, or other account, etc.
Where to open a Coverdell ESA plan
In most cases, a mutual fund house or a discount brokerage firm will offer better options and lower fees than a local bank or credit union. Be sure to investigate all options before opening your account.
Here are a few discount brokerage firms that offer Coverdell ESA plans with reasonable expenses:
Scottrade. Scottrade is a well known and respected discount brokerage that offers online trading and local branches. Features include: $7 trades, no minimums or custodial fees, online tutorials and education center, and more. Read Scottrade Review, or Open a Scottrade account.
E-Trade. E*Trade has been rated #1 Online Broker for 3 consecutive years by Smart Money Magazine (07-09). E-Trade features a full scale bank along with its brokerage division. The bank/brokerage combination is an attractive if you prefer to do more of your banking and investing with one financial institution. E-Trade features: Full feature bank, $9.95 stock trades, no custodial fees with electronic statements, no minimum balance, and more. Here is an E*Trade Brokerage Review for more information, or you can Open an E-Trade account.
*Bonus Offer. E-Trade offers 100 free stock trades for new customers who open a new Roth IRA with their brokerage. Here is more details about the 100 free trades with new IRA.
Zecco. Once upon a time, Zecco offered free stock trades to all investors. This feature is no longer available unless you meet minimum requirements, such as maintaining a balance of $25,000 or if you make 25 trades per month, then you get 10 free trades. That said, standard stock trades only cost $4,50, which makes them among the lowest in the industry. Zecco account features: $4.50 stock trades or lower. No custodial fees, no minimum balance, and more. Read Zecco Review, Open an account with Zecco.
TradeKing. TradeKing has been rated best overall discount broker and best in customer service by several authorities in the financial industry. They offer $4.95 trades, free trading and educational tools, free access to Maxit Tax Manager, and more. TradeKing account features: $4.95 stock trades, No custodial fees, no minimum balance, Read TradeKing Review, Open a TradeKing account.
Which brokerage firm is best for Coverdell ESAs?
Many other brokerages and mutual fund houses also offer Coverdell ESA plans. You may find it best to work with the investment firm that handles most of your current investments, or you may find it better to work with a new company if they offer better rates or investment options. As always, shop around for your needs.
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{ 2 comments… read them below or add one }
Great site. I have 2 young children and live in NYC. I will be moving to Maryland in one year. I want to begin a 529 for both of them and want to know if it is better to open an account in one state over the other. Thanks
AP
AP, check out this article about How To Choose A 529 College Savings Plan. Each state has different rules regarding state income taxes and there may be other benefits. The end of the article has a link to the best plan for each state, as determined by Kiplinger. Best of luck!