>> Yes it is a risk and you may have to pay some taxes but couldn't the return be the same if not better if you place the $500 somewhere other than an MF?-------------------------There is no requirement that an education IRA be invested in a mutual fund.The limiting factor for investing in individual stocks is that only $500 can be added to an education IRA each year. That's not enough to invest in more than one stock if you're following the Foolish precept of keeping the commissions below 2 percent.For that reason, I would invest the first year's $500 in SPY or a comparable index fund (if a satisfactory one is available through the particular brokerage), and then consider moving into individual stocks when I added the second year's $500 and thus had $1,000 (plus whatever had been earned the first year) to work with.It is hard to predict the tax consequences. Withdrawals from an education IRA are tax free when used for higher education, which could turn out to be a significant advantage. But that depends on the tax laws at the time and on the child's tax situation, about which we can only guess.One thing that I like about an education IRA, in contrast to accounts under the Uniform Gifts to Minors Act, is that the IRA funds are only freely available to use for education. UGMA funds come completely under the child's control at age 18 and can then be withdrawn and used for anything whatsoever (to buy a fancy car, travel the world, give to a cult, you name it).
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