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>> Should I open the account in my name or my daughters? Can you open an education IRA with a discount broker when you are only investing $500 a year?
Discount brokers will accept Education IRA accounts even though only $500 can be invested per year. I just checked Waterhouse and it appears that there is no minimum balance for such an account.

As I understand it, the Education IRA must be opened in the child's name, although obviously you will manage it. Incidentally, anyone who falls within the modified AGI limits ($95,000/$150,000) can contribute to the Education IRA, up to the maximum of $500 per child per year (from all contributors together).

I don't see any way to use a company's DRiP for an Education IRA, because of the IRA custodial requirements, but that is a question that you could ask on the DRIP Investing board.

Because of commissions, if you invest through a discount broker, you will need to limit the number of stocks for the first few years. In fact, the $500 initial investment pretty much limits you to investing in just one stock for the first year, and I would be inclined to make that SPY, or an index fund if the brokerage offers a satisfactory one without a transaction fee, because I'd be too uncomfortable with a one-stock portfolio.
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