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Congratulations for starting in the right direction. I started my daughter's education IRA last year, the year she was born, and the first year that this (EdIRA) was an option. I'm a self-professed amateur who loves to invest, and here's what I found:
Quick & Reilly (who I used) will set one up for no charge and has no annual fee. I'm sure that many nationally known houses (i.e. Schwab, Fidelity) will do the same, if you call and ask. Q&R and Schwab (both of which I use for different accounts) both have lists of mutual funds you may buy with no load, no transaction fee (NTF funds), and would be happy to send you lists upon lists. All companies that I contacted had simple applications and instructions for setting up the EdIRA's and packages with helpful information.
As for investment choices, I chose BTIEX, Banker's Trust Investment Equity 500 Index Fund. I found that they had slightly lower annual/maintenance fees (0.25%)than the rest of the S&P Index funds that I looked at.
Most of my investments are in individual stocks, but I chose mutual funds for the education IRA for 2 main reasons. 1. The annual capital gains do not get reported/taxed. If you own stock, YOU decide when to take capital gains by cashing in, and you pay taxes accordingly. A mutual fund with distributions will rack up the income in years to come, if the mutual fund is not in a sheltered account. You can't control the distributions, and if your child earns too much, it will be taxed at YOUR rate. So, I plan on investing in stock in non-education IRA accounts (I'll take my gains when I think best), but stick with mutual funds where the tax shelter pays off. 2. $500 per year is NOT a lot of money to invest with. I cannot buy many shares of stocks for the money and have any sort of diversity. A growth or index mutual fund gives me protection against the all-eggs-in-one-basket problem. The DRIP idea is a good one, unless you pick the wrong company. I have a great record of picking the wrong horse and suffering for it. I'd rather not subject my daughter's education to my investment mistakes -- take the index, it's much more a sure thing!
Here's another thing to remember -- the S&P 500 index is weighted by the size of the company. It is NOT equal portions of all 500. So, the ten largest stock holdings reported in the Banker's Trust Investment Equity 500 Index Fund semi-annual report are: Microsoft, GE, IBM, Wal-Mart, Cisco Systems, Lucent Technologies, Intel, Exxon, AT&T and Merck & Co. One or more of these very well might have been the stock you would choose for a DRIP investment -- here you can have them all. I believe that I've heard that virtually ALL of the S&P gains for the last couple of years have been just a small handful of companies. If you know which ones will be that small handful for the next 20 years, then PLEASE let the rest of us know. That's why I'm sticking with the index.
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