In a time where college tuition is growing at an alarming rate, the last thing parents and college bound children need is to have their education savings pulled out from under them.

Unfortunately, that’s exactly what happened to many American who thought they were secure in their state-sponsored 529 plans.

According to a recent article in the Wall Street Journal, parents across the country are becoming “529 Dropouts.” The recent market turmoil has left many 529 plans in shambles.

The “Achilles Heel” of the 529 plan lies in the highly restrictive investment choices available from most states. Some play it safe and invest the funds in highly conservative assets such as bonds while others seek to increase gains by increasing risk with mutual funds and other stock market based assets.

In either case, the account has very little, if any, control over how their hard earned education savings are invested. On one side, they are safe but earning next to nothing, the other trades safety for potentially higher gains.

But both lack the ability for the account owner to make any real investment decisions about the funds.

Coverdell Education Savings Accounts can be Completely Self-Directed

The answer to this conundrum is, of course, the Coverdell Education Savings Account, a.k.a. CESA.

The CESA is similar to 529 plans in that it is a tax-advantaged savings account that can be used to pay higher education expenses. That’s about where the similarities end though.

In fact, the CESA may have more in common with the Roth IRA than it does with the 529 plan.

• Contributions are made with after-tax dollars
• Qualified distributions are tax-free (Not limited to college tuition like the 529)
• Virtually unlimited investment possibilities

The additional flexibility offered by the CESA allows creative and savvy parents to truly self-direct their children’s education savings. No more restrictions imposed by conservative state run plans.

The Coverdell is a great way for you to take your own investment expertise and put it to work for your child’s future education. With such a broad range of permitted investments, there is something for everyone. Whether you know real estate, tax liens, foreign currency or even livestock, the Coverdell can help you ease the pain of rising education costs.

And while some may say that the $2,000 per year contribution limit of the CESA is a deal breaker, there are plenty of alternative investment choices that can be employed with a small new account.

Tax liens, for instance, are a great way to get started with an account with limited funds. You can learn more about using tax liens in a self-directed account in one of our upcoming webinars on the topic. The first is Tuesday, November 17, 2009.

If you think a self-directed Coverdell account may be the answer for your children or grandchildren, contact one our Account Specialists at 1-888-382-4727.

Related posts:

1. Educational Costs are on the Rise – Save Wisely with a Tax-Free Roth IRA or Coverdell Education Savings Account (CESA)
2. Paying for College – A Fading Vision or a Dream Come True?
3. The Washington Post Details an Alternative Health Care Plan, the Health Savings Account (HSA) to Help Reduce Your Medical Costs

Filed under: CESA, Equity University, IRA Education, Investment Opportunities, self directed IRA on November 16th, 2009