April 14, 2003  Email this  Print this
 License or reprint this article
SAVING FOR COLLEGE
Uncover the Best Coverdells
by Kristin W. Davis You can open IRAs just about anywhere, but not so Coverdell education savings accounts (ESAs), which used to be called education IRAs. Several of the nation's large mutual fund companies, including Fidelity, Mass Mutual, Pimco and Putnam, have chosen not to offer the accounts. This is despite a congressional decision to hike the annual contribution limit to $2,000 per beneficiary starting in 2002. "We feel that 529 plans are the superior option right now," says Sarah Friedell, a spokeswoman for Fidelity, which runs the numerically named, tax-favored college-savings plans for Delaware, Massachusetts and New Hampshire. (Any U.S. resident can invest in Fidelity's plans and the money may be used to pay for college in any state.) Other fund companies that shun Coverdell ESAs are also in the competing 529 business. Most brokerage firms offer ESAs, with the exception of Fidelity and Credit Suisse First Boston, which says that the accounts are under consideration now that the contribution limit has risen.
Although finding a home for an ESA might entail some effort, you may find it well worth your while.
Both ESAs and 529s allow you to save for college tax-free. But ESAs have two key advantages: They allow you to choose your own investments, while 529s offer a limited slate of choices. Perhaps more important, you can make tax-free withdrawals from an ESA to pay for elementary and high school expenses, including tuition, room, board, uniforms, tutoring, and even computer equipment and software. Money in 529 college-savings plans is -- no surprise here -- limited to college expenses. Earnings withdrawn for other purposes are taxed and hit with a 10% penalty.
| OPEN ARMS |
|
Rather than turn their backs on ESAs, these mutual funds and brokerages offer good deals.
|
But the $2,000 limit on annual contributions unquestionably makes ESAs impractical for large lump sums. Alternatively, 529 plans allow you to contribute as much as $100,000 to $250,000 at once. And while anyone can contribute to a 529 plan, ESA deposits aren't allowed if the contributor earns more than $95,000 as a single taxpayer or $190,000 filing jointly.
Among the firms that do offer Coverdell accounts, some are less friendly than others to small investors (and because of the contribution limits, all ESAs are destined to be small for a while). UBS PaineWebber, for instance, charges a $40 annual account-maintenance fee -- a hefty 2% of a $2,000 account. But Charles Schwab & Co., First Union Securities, Janus, JP Morgan Chase and Scudder Investments charge no annual fee.
Most large brokerages have account minimums as low as $100 (or none at all). Minimums range from none at several mutual fund companies to $1,000 at Scudder Investments and the Vanguard Group.
| |
GETTING STARTED