Investment Strategies for Coverdell ESAs
Rules and Regulations Regarding Investing in a Coverdell Account
Jun 30, 2009
Coverdell Education Savings Accounts are tax-deferred accounts designed to encourage parents to save their children's education. To read more about Coverdell accounts (also known as Educational IRAs), read Coverdell ESAs- Saving for Higher Education.
529 plans and Coverdell accounts are both intended for saving for higher education but investments in 529 plans generally are limited to the mutual funds that the plan offers. A Coverdell account offers much more flexibility than a 529 plan in the type of investments allowed. Investments in individual stocks, bonds and mutual funds are allowed and the parents have much more control over their investments.
Rules Regarding Investments and Prohibited Transactions
- All contributions must be made in cash.
- Investments in collectibles are not permitted. Art works, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and other types of tangible personal property are not allowed. The only exceptions are the gold and silver coins minted by U.S. Treasury and certain forms of platinum, gold, silver, palladium and platinum bullions.
- Mixing of assets in a Coverdell account with other assets are not permitted- Educational Savings Accounts need to be set up and maintained separately from any other assets.
- Financial transactions with the ESAs are not permitted.
- Assets in a Coverdell ESA cannot be pledged as collateral for any sort of loan. The same restrictions apply for taking a loan from a Coverdell account.
- Money in the account cannot be invested in life insurance contracts.
Investment Strategy
Investment strategies largely depend on a person's tolerance for risk but historically stocks have yielded better returns than bonds and money market instruments. For a newborn with an 18 years time frame, investing entirely in stocks may be the better idea but for a 15 year old with three more years to go for college, protecting the value of the assets becomes important. In that case, it may be better to invest in bonds and money market instruments.
The sooner one starts saving for a child's college, the better the return on the investments. That is because of the favorable effect of compounding, in addition to the ability to invest in growth oriented investments like stocks.
It is always better to seek the advice of a good financial planner before choosing an investment strategy. See Tips for Choosing a Financial Planner for good advice on choosing a financial planner.
A Coverdell ESA can be opened at any bank or financial institution that offer the services. Since the annual contribution limit is only $2000, fees and commissions can eat up a large part of the portfolio if one is not careful. Be sure to ask about the annual maintenance fees and brokerage commissions while opening the account.
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