I’ve been reading up on these things for my son, but want to get some feedback from the lot of you Americans out there.
The Coverdell is an Education IRA and the money can be used for pretty much any “school” fee. But the maximum contribution is smaller, 2000US/year.
The Roth IRA is a bit more like a regular IRA, higher max or 4K. But can the funds be withdrawn for education purposes?
What say you?
thanks
jdswampedinprospectus
Does your son have earned income at this point? I think that is required for the Roth IRA, but I could be wrong.
There are other options for your son besides these. The good people at the Motley Fool have a nice comparison chart of the three most popular plans. Click around the site for more info. fool.com/college/compare.htm
Coverdell ESA
(1) max $2000/yr per beneficiary (eg, child) - if you have more than one child, then you can put $2000 in for each child
(2) no deduction for contribution
(3) distributions tax free if used for educational expenses (doesn’t matter how old you are when you pull the money out)
Roth IRA
(1) Max $4000 per contributor, and requires earned (non-excluded) income to “support” the contribution
(2) no deduction for contribution
(3) distributions of the contributed funds are tax free when taken out, whenever taken out, but once you distribute out the contributions, then you start to distribute out the built-up investment earnings, which are tax free if you are 59-1/2 or over, or taxable and subject to 10% early w/drawal penalty if you’re younger and don’t meet any other exception.
In both cases, be careful of income limits, high income disqualifies you from making these contributions:
Coverdell:
Any individual (including the designated beneficiary) can
contribute to a Coverdell ESA if the individual
You forgot the third option, JD: 529 College Savings Plan. You’ll see it’s mentioned in the Motley Fool comparison at the link scomargo posted. 529 refers to the code section of the Federal law that authorizes such plans. As I explained elsewhere, I believe various brokers offer 529 plans, but the one I set up for my daughter’s college fund is through my broker, TD Waterhouse. Here’s their comparison of 529 v. Coverdale:
It is all a little confusing, but as I said before my brother uses a 529 plan for his kids (the oldest has just started taking out the funds for tuition), he recommended it, I looked into it for a while, read the literature and decided to go with it. No complaints so far.
[quote=“Mother Theresa”]You forgot the third option, JD: 529 College Savings Plan. You’ll see it’s mentioned in the Motley Fool comparison at the link scomargo posted. 529 refers to the code section of the Federal law that authorizes such plans. As I explained elsewhere, I believe various brokers offer 529 plans, but the one I set up for my daughter’s college fund is through my broker, TD Waterhouse. Here’s their comparison of 529 v. Coverdale:
It is all a little confusing, but as I said before my brother uses a 529 plan for his kids (the oldest has just started taking out the funds for tuition), he recommended it, I looked into it for a while, read the literature and decided to go with it. No complaints so far.[/quote]
[quote]
$300,000 maximum lifetime contribution.[/quote]
That looks good from the 529 side of things, not that I’ll ever hit it, but 2K per year seems low and I think a Roth is out as no earned income.
That seems to take care of the earned income requirement.
Thanks guys. I’ll keep you informed.
jds
I also have a 529 plan for my daughter. It seemed to be the most flexible in my case. The Roth IRA is tricky for ex-pats because you have to have taxable earned income to contribute. If all your earned income is subject to the foreign earned income exclusion then you can’t contribute to a Roth IRA because none of your earned income is taxable. And then there’s only a small range of income above the exclusion amount before you’re making too much money to contribute. That pretty much rules out most expats from contributing to a Roth IRA. (There’s a thread over in the Tax section on the topic of Roth IRAs.)
Thanks Jlick, I’ll check it out. 
Well, about to start a 529 for the boy. Now for the meat for the bones…what to put in it.
I like the Vanguard small cap index, but will check to see if it is a total small cap index.
The Vanguard total international stock index looks good.
And the Goldman Sachs Real estate securities will be something I look into …
out of the 21 funds you can choose from, I like these best.
opinions?
[quote=“jdsmith”]Well, about to start a 529 for the boy. Now for the meat for the bones…what to put in it.
I like the Vanguard small cap index, but will check to see if it is a total small cap index.
The Vanguard total international stock index looks good.
And the Goldman Sachs Real estate securities will be something I look into …
out of the 21 funds you can choose from, I like these best.
opinions?[/quote]
I guess great minds think alike. Our first is due in August and I’ve been looking into this after reading MT’s advice in another thread. Like you, I’ve been looking at some of the Vanguard funds. For our retirement, I don’t mind putting money into small cap index funds and other stuff that fluctuates dramatically, but I’m a bit weary of doing that with education savings. For our retirement, there’s more time for the market to pick back up if I manage to throw in at the wrong time; I can also put in a good bit more than what the education funds allow, so I can be pretty diverse from early on. For the kid’s education fund, he will need it at the end of a fixed period that’s a good bit shorter than my career will be. He’ll also need to draw most or all of it out quickly rather than over the course of a couple of decades as with retirement funds. Because of this, I think it’s good to be a little more conservative with education savings than with retirement savings. However, I’m not planning to save enough to cover all of my child’s education. Even after cuts for subsidized loans in the US, student loans are still pretty cheap. Perhaps I’m a bit old school, but I prefer for my child to have to put some of his own money into his education, even if that money is borrowed. It’s an investment that will definitely pay for itself during his career.
My daughter’s 529 is with TIAA-CREF which administers California’s 529 ScholarShare plan. They have an option where the investment strategy changes based on the beneficiary’s age, so for a newborn it’ll have more equities and then gradually get more conservative as she reaches college age. That might be something to look into if you want to make sure there’s something left by the time she needs it.
(California is somwhat arbitrary but it’s more likely she’ll go to a CA school since I’ve spent most my life there.)
JT, I wouldn’t worry too much about market fluctuations over a 20 year period. I have read that small cap stocks are set to outperform large caps for the next decade at least, as commodities are rising through the roof and despite great earnings, large caps are not going up.
Anyway, I have a question about how the 529 can be managed. Can additional funds be added to the portfolio? Can funds be sold and the money transferred into other investments tax free within the offerred portfolio??