# ESA Coverdell or brokerage account for kids living abroad?



## johnny13 (Feb 13, 2012)

I have a 4 year old and 7 month old (both US citizens as am I) and we reside abroad. I'm wondering what my best options are here for investing for them. I started an ESA (Coverdell) for my 4 year old about 3 years ago but now I'm thinking before I open another one for my 7-month old, if I should instead just open up a separate brokerage account for them. My concern is that if my kids go to college here abroad (where it's 100% government paid) or earn a scholarship or don't go to school that I'm ____ out of luck and will be penalized when it comes to wanting to move or withdraw the money from the Coverdell and any accrued capital gains. 

Anyone else in a similar situation? I'm just curious what I should do before I just go ahead and open an ESA now for my baby son.

What's the best option here for me? Should I just open up separate brokerage accounts for each of them and invest in an ETF (or similar with a low turnover rate) so that I know I'll be able to withdraw/move those funds without penalty and would only pay taxes on the gains.

I should also mention I have a non US-citizen wife. Wondering if I could "gift" her money to put into accounts on their behalf to circumvent any burdens? Just throwing out there.

Thanks for any help/advice here on this.


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## BBCWatcher (Dec 28, 2012)

If you're going to have/open a U.S. tax-advantaged higher education savings account then a 529 plan is a better deal than a Coverdell. Last I checked (fairly recently) New York's direct 529 plan is the best deal running, specifically their Vanguard age-based index fund.

For the 529s you can change the beneficiary(ies) any time you want. The beneficiary can even be yourself, a nephew, a cousin, your second cousin's niece -- it doesn't matter. Anybody with a Social Security number, really. Also, the funds can be used at any U.S. Department of Education-listed higher education institution, as long as they're paid directly to the institution (as I recall). That includes lots of institutions outside the United States. Also, I think 529 funds can now be used for things like buying a laptop or tablet computer if that's at least nominally required for the educational program. So it's not just tuition, even if the tuition is paid 100%.

So let's suppose your kids go to a non-listed institution, 100% government paid. You can still use the funds to help your kids spend a semester abroad at a U.S. college/university. That works, and that'd be a great use of the funds IMHO. Or a semester abroad at an institution that is on the list. Or a graduate school that is.

That said, if you live somewhere that doesn't respect the tax advantages that Coverdells or 529s offer, then they probably don't make much sense, or at least they make less sense. In your case it depends on Finland's tax code and tax treaty (if any) with the United States.

For what it's worth, I have some 529s, but I live in Singapore. I think the 529s make a lot of sense. It's highly likely there will be at least one child who will attend an eligible institution (or who will have eligible educational expenses) that I will want to support financially. So I'm taking that deal. YMMV. I dollar cost average into the 529 accounts, and it's already looking like a great deal.


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