Best Broker for Coverdell ESA / Education IRA

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As a follow-up to my Coverdell ESA vs. 529 Plan comparison, I was looking for the best discount brokerage to open up a Coverdell Education Savings Account. Although you could also open an ESA at a bank for slow but steady growth, many people prefer to invest at a brokerage firm where they can invest in stocks and bonds.

Coverdell ESA information can be hard to find for many brokers. Sometimes the only way I could tell if they offered ESAs was to start an application and look to see if it was an option. Many of them consider the Coverdell ESA as an IRA and list it under “Educational IRA” alongside Traditional, Roth, and SEP IRAs. Therefore, when looking at the fee schedules you should assume that an IRA annual fee or IRA maintenance fee will apply to your Coverdell unless otherwise listed. Other things to look for:

  • Annual maintenance fees.
  • Minimum opening amount or minimum contribution size requirements.
  • Investment options – mutual funds, ETFs, individual bonds, etc.
  • Commission costs.

Two of the biggest mutual fund companies surprisingly do not offer Coverdell ESAs: Fidelity and Vanguard. (Vanguard no longer opens new ESAs, but still services old accounts.) My guess is that the low contribution limits and thus low balances don’t offer them much opportunity for profit, especially with all the additional paperwork involved for tracking contributions and withdrawals. Many mutual funds also have minimum initial investments higher than the $2,000 annual limit.

Top Pick

TD Ameritrade. The main reason why I picked TDA is that it provides the best available access to low-cost index ETFs due to their list of 100 commission-free ETFs which include the most popular ETFs from Vanguard, iShares, SPDR, and Powershares. This means you can build a very diversified portfolio with both no commission costs and using best-of-breed ETFs with high trading volumes. TDA also has no account maintenance fees and no minimum contribution requirements. $9.99 equity trades otherwise.

Other Worthy Options
The following brokers also offer Coverdell ESAs and have been ranked in various “top broker” lists from SmartMoney, Barron’s, and Consumer Reports. Many people may simply choose to open an account where their other accounts already reside. In no particular order:

  • Scottrade. $7 equity trades. Must open with $500. No account maintenance fees.
  • E-Trade. $9.95 equity trades. Must open with $1,000. No account maintenance fees.
  • Schwab. $8.95 equity trades. Schwab offers own line of low-cost index ETFs with no commission, albeit with limited volume. Must open with $1,000 or sign up for automatic monthly transfer of $100 or more. No account maintenance fees.
  • TradeKing. $4.95 equity trades. No minimum to open, no account maintenance fees.
  • Capital One 360 Sharebuilder. $4 scheduled window trades (not real-time). Offers dollar-based trades. No minimum to open, no account maintenance fees.
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  1. I have coverdall plan with provider who is not commonly but came across via another blogger. It’s Permanent Portfolio funds which has a fund really diversified to have commodities and bonds and stocks. They been doing good and I been with them for the past 3-4 years not.

  2. We opened a Coverdell ESA for our 4 year old when she was born, but T Rowe Price informed us that they would stop accepting further contributions or opening new accounts due to the possibility that several attractive benefits associated with ESAs may expire at the end of 2012:
    • You may no longer be able to make a contribution to both a 529 savings plan and an ESA in the same year for the same beneficiary.
    • Expenses for kindergarten through 12th grade may no longer be covered by ESAs.
    • The annual contribution limit may be reduced to $500
    Further, if there are not enough funds to meet the minimum, there could be an annual account maintenance fee (really deep in the fine print). We will most likely roll over the ESA funds into our 529.

  3. @Ron – That sounds like exactly the same debate that was going on in 2010, before Congress extended it for another 2 years through end of 2012. I really don’t know why Congress can’t seem to plan things out beyond the next election cycle. The same thing bothers me about the tax rate on dividends.


    What Ron was saying.

    I hope they extend the K-12 distributions. The other thing I have done my my child was get her a whole life policy at $500 a year. It is about $90,000 of coverage, but should be a good account to use for college if she needs it. Also it is not reported to FASFA.

  5. Had a similar experience over the pond in the UK with our ‘Child Trust Funds’. One government spends the best part of their time in office promoting them (by offering all new borns a £250 voucher to get the savings account started). It was very popular tax free form of saving. Then overnight, a change in government and it is abandoned. Now the finance houses show little interest in ‘old’ trust funds and their performance has suffered. Disappointing…

  6. I have a Coverdell account with Etrade. So far so good can’t complain. Would love to have comission-free etf trades, similar to what TD Ameritrade offers, though.

  7. I found the website a great starting point and ended up with our Coverdell at Gabelli a high-end a more obscure and more costly fee option but their returns are good for the 15yrs I plan to sit on these investments. The 529 ended up split between T-Rowe as the Alaska Plan and Fidelity Vanguard funds through Iowa 529 plans.

    I got concerned with parking all the funds into a single provider – not really interested in having too many options either though (100 + ETFs)

    slow and steady (I hope)

  8. This is a great blog, you have a lot of useful financial tips- much appreciated! In regards to Scottrade, I’ve been using them and Sharebuilder for about four years now and I think Scottrade is handsdown better. Their site is easy to navigate, their offices are all over the country (which can be really helpful if you have to speak with someone or visit their office) and when you do research on companies before investing, they offer a solid mix of resources to help with making decisions. Not to give them a “plug” 🙂 Just wanted to share my experience with them in case visitors are on the fence about which to choose.

  9. Just wanted to say thanks for this detailed post. It really saved me a lot of time in determining where to open up my baby’s ESA!

  10. Thank you for this post. I’ve been doing research for two days now trying to find the best option for an ESA for my high school daughter.

  11. I warn you, do not open an ESA with TD Ameritrade! They might be good for other investment options like IRAs or taxable accounts, but they have created zero infrastructure to support ESAs.

    I just opened an ESA with them last week, and regret it horribly!
    – You cannot make electronic deposits to the ESA; you must print form, write check, mail it in. And if in Jan-April I still cannot designate to put contributions toward the previous year as allowed by tax code, because there is no place on the deposit form to list this. You also have to create the ESA account by paper form and mail … should have been a warning to me.
    – The website cannot show you contributions for the year or remaining allowed. Nor for past years. After 1 hour on hold, tech support came back and said it is because the ESAs are processed by the website the same as an IRA. but there are enough differences in their system for ESAs the website has many errors, and it is unlikely to be addressed any time soon, if ever. The ESA volume is too low to be a priority for Ameritrade to fix the bugs. After talking with 4 representatives, none of them were familiar with ESAs or the “unique” problems I was facing and had to call others and I was on hold a long time, just to find out there is no solution.

    • Stewart,
      I can atest to the physical method to make deposits to the TD Ameritrade ESA. The web interface does mimic that of an IRA. The only location I could find contribution history is on the monthly Statement under the “Retirement Account Summary” table, denoting YTD contributions for the current and past year.

      However, have not had a problem depositing contributions under the appropriate tax year. The form, TDA 2420 notes to include the “tax year of contribution on the memo section of your check” and if not indicated, it will be for present year.

      Despite the disadvantage noted, TD Ameritrade is the only broker I could find permitting a wide choice of fund or ETFs to invest in without the added buy/sell fee. This assumes picking from their NTF options.

    • I have learned more about my new ESA at TD Ameritrade, and retract my previous entry and now highly recommend TD Ameritrade ESAs … I’ve discovered a slightly annoying but effective workaround for making online deposits and tracking annual contributions.

      The deposit problem with the ESA is somehow related to it being a custodial account you control for your child. Because the ESA is technically in your child’s name, TD Ameritrade will not let you transfer money from your own external account directly to it. This half-way makes sense to me. The workaround … In order to make online deposits you must create your own separate investment account in your name (I opened my own “Standard Taxable” personal account). Then TD Ameritrade allows you to link this new separate account to your child’s ESA account on the website. And linking these accounts gives you the ability to make “internal” transfers between the accounts, once you send in a signed form the website prompts you to complete. Then online you can link your external checking account to this new personal account. Finally in this way, you can make online deposits from your external checking to your personal account, then from your personal account to your child’s ESA. I’ve even setup monthly recurring transfers scheduled a week apart for this double-transfer process.

      Also, another nice surprise is when submitting the transfer from your personal Ameritrade account to your child’s ESA, the webpage accurately lists the contributions you’;ve made to the ESA per calendar year and allows you to select the contribution year for the transfer when between Jan 1 to Apr 15. Also, linking the accounts allows you to control both accounts with a single login, and you can easily select between each account once logged in, using a drop-down menu at the top of the page.

      All in all, a pretty good implementation for the ESA and something I can easily live with now that it is all set up. I hope my original post didn’t discourage you, TD Ameritrade is a good place to open an ESA once you do some one-time setups and mail in forms. Now no more mail required.

      Best regards,

      • I just got off the phone with TDA and they said you have to fund by check… mailed. My gut sank… I was like ‘really?’.

        Stewart, if this works I’m going to give you a hug! (metaphorically)

    • Exactly the same experience. I spent over 45 minutes with a hung-over tech support person trying to figure out why the ESA would not accept an electronic transfer from my bank. Finally she gave up and sent me to another person who after reading lots of text (while I was on hold) and then asking someone else finally said “You must mail in a check.” I also said, “really”? He said, “I don’t know much about technology, but apparently this is a technology issue.”

      You are correct in that they are not putting money toward infrastructure and they are not training tech support so that they understand the issue.

      I have a local Scotts Trade office so plan to stop by and compare TD Ameritrade to them. Having a local office is a plus. I have 4 grandchildren so I don’t want to be struggling with technology issues each time I want to make a deposit. Also, when things don’t go well, I wonder about how secure their site is. Just saying….

      Other than making deposits, TDA is quite functional. I mainly trade stocks instead of buying ETFs and the commission is a little higher at $9.99 a trade than I like to pay. My primary account is fidelity, so I’ve compared the two websites. The TDA is actually more user friendly than Fidelity IMO.

  12. Thanks Stewart for following up with the useful info!

  13. Cris Cannon says

    Trying to set up an ESA for my grand daughter, a year old. This is for private secondary school. TD Ameritrade or Scottrade? Which is the best or are there others I should consider? Thanks! :-))

  14. I know this article is a few years old, but, FYI Capital One is getting out of the brokerage business, including ESAs. E*Trade bought all their investment accounts.

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