The Coverdell IRA really offers 2 advantages:

1. You can, as you point out, use it for primary education. It is the only tax favored savings plan that allows for this. And

2. The definition of 'Qualified Educational Expense' is the most liberal, including the regular tuition, fees, books, tuition and board...and also includes transportation and any special needs, such as uniforms

But it also has a couple of drawbacks.

1. At $2,000 max contribution per year, it'll be very difficult to save very much

2. Contributions must be cash and made after tax

3. Must be used by age 30, although unused portion may be transferred to a sibling...assuming there is one with a qualified educational expense. Withdrawals of earnings will be subject to treated ordinary income and a 10% penalty.

4. There are AGI maximums for contributions

5. Many custodians don't offer Coverdells, and many that do charge fairly hefty annual custoidal expenses due to their low volume

Except for the primary education benefit, there really is no advantage to a Coverdell over a 529 plan for most parents. You can choose to use other states 529 plans if yours isn't very good.

I think a better option would be to allow 529 plans to spend up to $xx per year for primary educational expenses, and let the Coverdell expire.

Just my view

BruceM

Thanks for replies.  Bruce, reasons1 and 2 as stated in your post are exactly why I chose the ESA.  One major advantage that wasn't mentioned is that I can choose my investment from a much broader universe of funds. I am a single father and at my income level, I can't even max out the $2,000 limit without cutting my retirement savings short; my child is only 4 though and I'm hoping that time and the magic of compound interest will help here.  I agree that if 529's were allowed to use X number of dollars toward primary/secondary education this would be a non-issue and a 529 would be just fine for me.  Thanks again.

 Damon

The problem with an annual max contribution of 2k is that many mutual funds have a higher minimum initial investment than that. Fidelity doesn't offer CESA accounts, I'm assuming, because none of the mutual funds they offer have a minimum initial investment lower than $2500. So you can imagine the difficulty of trying to fund a CESA with an annual contribution of only 500 bucks. Your options are very limited in that price range, though I did find some eligible funds and started a CESA with one of them. But, If the max. annual contribution reverts back to $500, the CESA will likely became a unpopular option for educational savings.

I chose a Coverdell ESA plan, with the following in mind:

1)  Possible use for pre-college educational expenses.

2)  Complete flexibility and control over investments.

3)  Can be done through almost any brokerage

4)  $2000 is the most I plan on investing annually anyway.  If that changes, it is possible to contribute to a 529 too.

5)  An ESA can be done with absolutely no annual fees or commissions, depending on investments and brokerage chosen of course.

I am aware of the sunsetting contribution limits, but that's years away so I'm not overly concerned.  If the $500 max is not revoked, then I investigate the 529 choices again at that time. 

In addition to revoking the $500 limit, I'd like to see occasional raises in the max contribution to match the increasing costs of college tuition and expenses.  The IRA program just had a similar increase, from $4k to $5k annual.  The same need could easily be calculated for ESA.

"The problem with an annual max contribution of 2k is that many mutual funds have a higher minimum initial investment than that. Fidelity doesn't offer CESA accounts, I'm assuming, because none of the mutual funds they offer have a minimum initial investment lower than $2500."

That's a flaw of Fidelity's, not the fault of the ESA program.  Most mutual funds have a lower initial investment requirement for IRA accounts, including ESAs.  There are very few mainstream funds that require $2000 or more for IRA / ESA accounts; $1000 seems to be the norm, but some can be found for $100 - $500.

Vanguard is another company with very high initial investment requirements, even for IRAs.  Huge Thumbs-Down from me.

There is a recent M* article with a list of recommended funds with very low entry points.  The article is targeted at "rebate" check investors, but the same would apply to people opening ESA accounts.

"So you can imagine the difficulty of trying to fund a CESA with an annual contribution of only 500 bucks."

You're right.  For $1000 you can invest in almost anything, but at $500 the pickings are slim.  Maybe none in some fund categories. 

Best Wishes,

-Bob 

Thanks, Bob.  I don't feel like such a loner.  I chose T. Rowe Price and was able to start an ESA with only $50 automatic asset builder contributions, which I bumped up to $100 with my first raise.  I also ask grandparents to put money in for Christmas and birthdays, helping me get closer to the $2000 mark (another advantage of the ESA-others can contribute)  Also, I chose a target date fund, so I could "set it and forget it" until 2 or 3 years before my little man starts college (if I choose to use it for that) at which point I will go 100% money market.  That's the plan, at least.  Thanks for all suggestions, advice, etc.

I feel I should add a disclaimer, related to my above post:  I'm no financial expert, and I'm certainly not trying to convince anyone else to invest the same way that I have.

With that in mind, I didn't look into T Row Price, but did compare several other brokerages, discount and full-service, before choosing Firstrade for the ESA account.  No minimum balance, no annual 'maintenance' fees, access to no-load / NTF funds, and interest paid on any uninvested balance.

Our account is funded similarly to your's - money gifts from relatives, and then topped off with money from our annual tax refund.

It took a while to build the initial balance and decide on specific investments.  In the meantime we happily collected interest on the cash balances.  Eventually settled on:

25% individual stocks - mixed results so far, and may not continue to do this

25% SLASX - $1000 min, no-load, NTF

25% JSVAX - $1000 min, no load, NTF

25% MDLOX - $100 min, 5.25% front load

In about 15 years we'll have to start looking at bonds, CDs, or similar.