self directed college savings plan

Please be more specific with "self-direct". 529 plans allow you to self-direct from a limited pool of investments, but you don't have free reign over any investment out there. They also allow at least a $12k annual contribution and you can even invest 5 years worth of contributions at once. Perhaps you are referring to a Coverdell ESA. That does have much lower limits. And state treasury sponsored pre- paid college tuition plans often do not allow any investment choices.

Throw us some more details, and we'll see what we can come up with.

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Aristotle sent the following in an email, to which I was unable to respond:

What you refer to is a Coverdell ESA. It's federally mandated and the contribution amounts are controlled by the government (similar to an IRA or Roth or HSA). More importantly the Coverdell ESA isn't specific to Vanguard. Almost every brokerage house in the country offers it. It's very common.

Another (better?) option is a 529 plan. The 529 isn't income tax deductible, but it grows tax deferred and the earnings are NEVER taxed if used for higher education expenses. It's kind of like a Roth IRA for education. Most importantly, you can contribute $12,000 per year, per child. You can even put in $60k today (but you have to wait 5 years before you can contribute again). Some states also allow you to deduct the 529 contribution from STATE income taxes if you use the plan that state sponsors. Sometimes the deduction is worth it; other times it is not.

You may want to read this:

529 plans don't allow you to invest in ANYTHING, but each provider offers numerous investment choices from multiple asset classes. Bottom line is that regardless of the investment choices, you likely aren't going to be able to save enough in an ESA to fully pay for a 4-year undergrad degree. In my experience, the 529 is far more commonly used.

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The Coverdell (ESA) is not taxed if used for higher education, either, but there are some other differences. ESA account must be used by age

30, and may be used for any level of education (even private grade or high school). ESA has income limits, about $200K MFJ, while 529 has no limit,

The 529s I've seen add a layer of expense, the Fidelity Account I have starts with a decent S&P index, but tacks a .5% adder when it's in the

529. However you do the math (11 yrs average or 22 yrs start to finish) it's an extra 5-10% which offsets the 'tax free' growth. The kiddie tax allows $900 tax free, and then $900 at the child's rate. This makes a case for some money in a UGMA, although that money in a child's name may reduce aid. Again, nothing is simple.

Joe

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A UGMA is also a completed gift that the child can spend on "hookers and beer" whether or not they ever attend college (although college is probably where most of the hookers and beer are:-)). In practice, this may not happen often, but that is officially a possibilty.

For the record, I'm not opposed to the ESA, I just happen to believe that its contribution limits make it a less effective vehicle.

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