QUESTION: Liz in New York has four kids and has been saving for their college education. They currently have a 529, but she wants to know if they should go with an ESA. Dave reviews each option.
ANSWER: The reason I recommend Education Savings Accounts is because they are always the same thing. That means you choose a mutual fund, which is what I would suggest
to put an Education Savings Account in. Coverdell is the nickname for it. It’s an ESA and you can put up to $2,000 in it per year and per child, which is up to $166.67 a month.
If you don’t like the mutual fund, you can roll it to another one. You completely control it; it doesn’t do anything unless you tell it to as far as jumping around from one fund to another.
There are several types of 529 plans. There is one type that works just like that ESA, but you can put more in it. If that’s what you have, and you choose the investment and it never changes or moves unless you move it or change it, and you choose good mutual funds with long-term track records, then I would be all right with that kind of 529 plan.
The 529 number is also a section in the IRS code known as section 529. It also covers prepaid tuition with the state plan, which I don’t like at all. It also includes a type of thing that is a life phase type of plan where the brokerage company or whoever you put the money with moves the money automatically to less risky investments as the child gets older. I’m not a fan of that at all because it puts you in the wrong places at the wrong times.
It’s too conservative, and it won’t keep up with the inflation rate for tuition. I would be in a different kind of 529 or in an Education Savings Account in a mutual fund if I were in your shoes.