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 you open a Coverdell account.
Here are a few discount brokerage firms that offer Coverdell ESA plans with reasonable expenses:
TD Ameritrade: TD Ameritrade is a mainstay among the top-ranked online brokerage firms, as rated by notable companies, including Kiplinger’s and Barron’s. TD Ameritrade features an award winning trading platform, a top-notch eduction center, and one of the top rated research platforms. There are no account minimums, no monthly maintenance fees, and customers can make stock trades online, with their smartphone or tablet, over the phone with a broker, or at one of over 100 physical locations. For more information, check out our TD Ameritrade review, or to open a TD Ameritrade account, visit https://www.tdameritrade.com/.
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, $9.99 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.
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.
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 our Scottrade Review for more information.
Mutual Fund Houses, credit unions, and other options. Some large mutual fund firms also offer Coverdell Accounts. These may be good options, depending on which types of investments you choose to hold in your accounts. Many banks and credit unions may also offer these accounts. I recommend researching these options before investing with them, because many banks and credit unions do not have as large a selection of investments to choose from, and they may have slightly higher fees than you can find at some of the larger investment firms. In general, I find it is better to keep your investments at a dedicated investment firm – there are usually more investment options and lower fees.
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.