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Finding the Best Broker for Coverdell ESA

Contributed by mm | July 20, 2005 8:00 PM PST

Following my 10-part research on educational savings options earlier this year, I'm now ready to open a Coverdell Education Savings Account for my kid. It is a long shot -- Coverdell ESA only allows for up to $2,000 contribution per beneficiary every year, so even with fantastic returns, it is not going to be enough for the bill. I'm mindful I have other savings options, like a 529 Savings Plan. However, with my little son's freshman year still more than a decade down the road, and I am saving a lot anyway, I'm not in a hurry.

Still, to set up a Coverdell Education Savings Account, I need to find a broker. Unfortunately, none of the current brokerage firms I currently use (namely Fidelity, Ameritrade and BrownCo), offers this type of account, so I have to find a new one.

With only $2,000 to contribute every year, I don't intend to do any active trading in the account. At best, I am expecting 1-2 mutual fund trades a year. With this in mind, I am looking for an account that:

1) is charging very little or none for maintenance (even an annual fee of $10 means an expense of 0.5%)
2) is charging very little or none for trading mutual funds ($10 a trade means 0.5% front-load for a $2,000 investment)
3) has a wide selection of inexpensive and quality mutual funds

My first stop is Vanguard. Vanguard has my mindshare of its collection of low-fee funds, so I should have no problem finding a good fund -- free trading of Vanguard funds will be a plus too. The good: Vanguard does offer education savings account. The bad: it charges a $10 per year per fund "Account Maintenance Fee" for funds with a balance of less than $5,000. In addition, it is unclear to me whether my boy's little account will also be subject to the low balance fee ($10 per year per fund for funds with less than $2,500 in balance) and/or index fund maintenance fee ($10 per year per fund for funds with less than $10,000 in balance.

Second stop is E*Trade. E*Trade offers Coverdell account too. There is no minimal, and annual fee is waived if one opts for online confirmation and statements, which is not a problem for me. It has a long list of no-load, no-transaction-fee funds, which should essentially cover my needs of a low-fee fund. One extra bonus is its 12b-1 fee rebate program. The 12b-1 rebate probably only amounts to less than $10 for a $2,000 initial investment, so it is not a big incentive for me.

Scottrade is worth mentioning too for people who are interested in Coverdell ESAs. It, too, charges no annual fee or maintenance fee for Coverdell accounts, and it has a no-load, no-transaction-fee fund list too (almost as long as the E*Trade list). The Scottrade advantage: it lists very high in J. D. Power's ratings of online brokers.

I guess I will need to decide between E*Trade and Scottrade. Who has some experience with either broker?

This Post Has Received 24 Comments. Share Your Opinions Too.


Jim Commented on July 21, 2005

i joined e-trade in grad school with money from my summer job ~$5k. at the time there were no annual fees, then about 9 months later they changed the rules to $15/quarter inactivity fee, like i was going to be making 2 trades a quarter with such a small amount of $.

i removed my money (and spent it on beer and such) and now several years later i've joined scottrade, and while their site is not quite as nice, their fees have been predictably low, and i do my research on yahoo


Carl Commented on July 21, 2005

Ameritrade does offer Coverdale accounts, as I have two accounts there for my daughters. However, you can not apply online, but need to write or call them for an application, which they can email to you.


Ye Commented on July 21, 2005

I use Scottrade exclusively and I love them. I believe they have the lowest fees in the no-minimum, no-inactivity fee category. However, I've not used them for anything else other than stock trades.

I've purchased Vanguard Index Fund before and from my experience they have one of the lowest fees. However, most of their funds require a minimum of $3000 investment. A $10 maintenance fee per year for a $3000 is not too bad. The dividends would cover the cost.


BA Commented on July 21, 2005

MM-

I can whole heartedly recommend Scottrade. If you are looking for no frills investing its the place to go. They've even revamped their site recently and use Gainskeeper for advanced online reporting tools now.

BA


CD Commented on July 22, 2005

I couldnt find a "Search" feature on the Scottrade website - isnt there one?


PC Commented on July 22, 2005

Have you considered TIAA-CREF. They have a broad range of low expense funds, and are generally friendly to the smaller investor.


AT Commented on July 24, 2005

I second the comment by Carl. I have an Ameritrade Coverdell account too for my daughter - you have to call in to get the app form. You can also enable options trading (covered calls only).

Also, agreed that is not much to put away, but be aware of the power of compounding. My strategy is going to be to buy $2k worth of SPY each year. I am already looking at a good 7% gain this year :)


Joe K Commented on August 23, 2005

Isn't it true that while the contributions to the Coverdell is only $2000, one major plus point of this account is that withdrawals can also be used for high school expenses vs only college? Not sure but thought I check with the experts here.


MM Commented on August 25, 2005


Chris B. Commented on February 25, 2006

Hi,
I found this blog looking to flee from E*trade; starting with an ESA. I have all my investments there now and will be migrating to another brokerage firm because the service is horrible.

Feel free to e-mail if you would like specifics.
chris_budasi@yahoo.com


Jim Davis Commented on January 20, 2016

I've maintained Coverdell's for 2 grandkids for the past 10 years at Scottrade, Never had any problems, low expense, easy to use. I recommend them highly.


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