Coverdell Account: DRIP vs Brokerage?
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Just had a baby and looking to set up a Coverdell account for her. I'm trying to determine if using a DRIP account would be more beneficial versus opening an account with a brokerage (Scottrade). If I use the DRIP approach, I would have to open an account for each stock versus the single brokerage account. With "maintenance" costs at $45 a year per DRIP account, I'm leaning towards a brokerage account. Any thoughts?
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Answer:
That's great that you want to start saving now for you child's college education. Nothing is more important and the best time to start is now. My question is what are the reasons for putting the money in this type of account in the first place? I understand that you receive a tax deferral on the gains in the account, but there are no guarantees that there will be any gains at all when you place your money in the market. Just ask parents that are sending their kids to school this year. These accounts also have a couple of other disadvantages such as being limited as to what they can be used for and counting against you more when applying for financial aid. There are better places to put your money when you are saving for college that will provide a guaranteed rate of return, tax free status not tax deferred, and the freedom to use that money as you see fit instead of the way the government tells you to use it. I would suggest speaking with a qualified college funding advisor to get you on the right path. If you need references for an advisor in your area, I can help. My question is why do you want to put it in stocks or mutual funds. There is a report called the DALBAR report that shows the real rate of return from investors in mutual funds. For the 20 years ended December 31, 2008, equity, fixed income and asset allocation fund investors had average annual returns of 1.87%, 0.77% and 1.67%, respectively. Investments with tax-free benefits and guaranteed rates of return will do much better.
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