Coverdell ESA for tutoring costs

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msj16
Posts: 366
Joined: Tue Oct 19, 2010 1:16 am

Coverdell ESA for tutoring costs

Post by msj16 »

Hello everyone.

I was just reading the Bogleheads Guide to Investing (2nd Edition) - great overall guide and thank you for the updated version! It advises that ESA's can be used for tutoring costs. I have already funded a 529 account for college and do not plan to add any more money to it. However, I think a small bit of Coverdell money to cover tutoring from high school through college years might be beneficial.

Has anyone used the ESA for this purpose? I see that Vanguard no longer offers an ESA. Does anyone recommend any other company for this?

Your advice is appreciated.
msj16
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The529guy
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Re: Coverdell ESA for tutoring costs

Post by The529guy »

I've been navigating these same waters recently. Here's how I've thought about the options I'm considering:

USAA
Pro:
- Access to commission-free Fidelity Spartan funds and Freedom Index target retirement funds
- Membership not required for investment products
- Can buy funds by dollar amount
- Automatic dividend reinvestment
Con:
- Minimum initial fund purchase is $2,500

Schwab & TD Ameritrade
Pro:
- Access to commission-free index ETFs
- No minimum initial ETF purchase
- No minimum to open account at TD Ameritrade; $1,000 minimum (or auto $100/mo) to open account at Schwab
Con:
- Must buy ETFs by share rather than dollar amount
- Presumably no automatic dividend reinvestment

At the moment, I'm leaning toward USAA with the idea of contributing $2,000 at the end of the year (to leave in cash briefly), and then $500 more after Jan 1 to reach the $2,500 minimum for Fidelity Freedom Index 2025.

I prefer mutual funds over ETFs. Given the relatively low sums involved in Coverdell accounts, I'm ok with not getting the absolute lowest ER if it makes the process easier.
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Mel Lindauer
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Re: Coverdell ESA for tutoring costs

Post by Mel Lindauer »

Glad you enjoyed our new book, msj16.

I'm a firm believer that the first $2000 destined for a child's education each year should go into the much more flexible Coverdell ESA account. I don't know why Vanguard stopped offering them, but it could be related to the low annual contribution limit of $2000.

msj16 wrote:Hello everyone.

I was just reading the Bogleheads Guide to Investing (2nd Edition) - great overall guide and thank you for the updated version! It advises that ESA's can be used for tutoring costs. I have already funded a 529 account for college and do not plan to add any more money to it. However, I think a small bit of Coverdell money to cover tutoring from high school through college years might be beneficial.

Has anyone used the ESA for this purpose? I see that Vanguard no longer offers an ESA. Does anyone recommend any other company for this?

Your advice is appreciated.
msj16
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Leeraar
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Re: Coverdell ESA for tutoring costs

Post by Leeraar »

Mel Lindauer wrote:Glad you enjoyed our new book, msj16.

I'm a firm believer that the first $2000 destined for a child's education each year should go into the much more flexible Coverdell ESA account. I don't know why Vanguard stopped offering them, but it could be related to the low annual contribution limit of $2000.
Mel,

I believe Vanguard stopped offering them because Congress kept changing the rules. Remember, they were supposed to go away, but somehow survived the fiscal cliff.

Yes, you can use Coverdells for high school expenses, but that is also fewer years to generate returns.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
livesoft
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Re: Coverdell ESA for tutoring costs

Post by livesoft »

The529guy wrote:I- Presumably no automatic dividend reinvestment
It should be no problem whatsoever to set up free automatic dividend reinvestment of ETF dividends. For instance, I have that set up at TDAmeritrade for one account.
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The529guy
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Re: Coverdell ESA for tutoring costs

Post by The529guy »

livesoft wrote:
The529guy wrote:I- Presumably no automatic dividend reinvestment
It should be no problem whatsoever to set up free automatic dividend reinvestment of ETF dividends. For instance, I have that set up at TDAmeritrade for one account.
Thank you - this is good to know. I don't have any experience with ETFs.
Topic Author
msj16
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Joined: Tue Oct 19, 2010 1:16 am

Re: Coverdell ESA for tutoring costs

Post by msj16 »

Hi,

Just a quick note to say thank you for all of the helpful replies. As usual, the responses are so detailed that I can really create an action plan based on them.
msj16
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