ASK KIM
Coverdell Investing Strategies
by Kimberly Lankford

I have two kids, ages 4½ and 8 months. I have opened a Coverdell education savings account for both of them and put $1,000 in each account and plan to add to the accounts. For this investment to grow and also to ensure that I am able to withdraw money when needed toward education expenses, what are my options for investing the money? What sort of mutual funds and bonds should I be targeting, or should I put it into money-market accounts?

The best investments will depend on when you plan on using the money. Unlike 529 plans, which are limited to college costs, you can also use Coverdell money for educational expenses before then -- including tuition, a computer, printer, textbooks, educational software, tutoring and other expenses, whether your child is in public or private school.

Even though you can use the Coverdell money tax-free well before your kids start college, the longer you keep the money in the account, the greater benefit you'll reap from the tax-free growth. It's a good idea hold onto that money at least until your kids are in high school, so it has more than a decade to grow.

If you don't think you'll need to use the money for more than ten years, you should keep most of it in stock funds. Consider some of the funds in our long-term portfolio. You won't be able to invest in all of the funds until you have more money in the accounts, but you can start with some of them (T. Rowe Price Growth Stock if you have at least $2,500; Oakmark Select lets you in with just $500) and add additional funds when you get the extra money. See the fund snapshot links for each fund's minimum investing requirements. Then gradually shift to more conservative funds (our medium-term and short-term portfolios) as your kids get older.

If you think you'll use some of the money within the next year or so, open the Coverdell ESA at a brokerage firm where you can keep most of the money in the mutual funds but hold some in a money-market fund for immediate expenses.

For additional strategies, see the ABCs of Saving for College.