An education on funds for college
NEW YORK — One advantage of buying mutual funds is that you can tailor them to achieve worthy goals - such as socking away money for a child's college education.
And as any parent of college-age children will affirm, it's best to consistently save as much as you can, as early as you can.
According to an analysis by the College Board, typical costs run from more than $6,000 annually for a student who commutes to a public college, to well over $22,000 for a student who attends a private, four-year institution.
Mutual funds enable you to save - and compound your earnings - over long periods of time, not just in a short-term period, such as with bank certificates of deposit, says Tim Schlindwein, who heads up consulting firm Schlindwein Associates, Chicago.
Equity (stock) mutual funds, moreover, allow you to seek maximum growth. Mr. Schlindwein suggests you start with aggressive equity funds, and then gradually switch over to more conservative bond or money-market funds as the child gets close to starting college.
Remember, he says, "factor in inflation." For example, a $20,000 college tuition bill today, would be $34,000 18 years from now if inflation rose only 3 percent annually.
Among the most popular - and better-known - plans:
*Specially designated "gift" funds. These funds aim to profit over the long term. People invest in a gift fund for a set amount of time, such as 10 years, or until the child reaches maturity, whichever is longer. The drawback, however, is that your dollars are "locked in" - you won't be able to withdraw or redirect your money if the fund performs poorly.
*Trust accounts under the Uniform Gifts to Minors Act, or Uniform Transfers to Minors Act. This plan gives the custodian greater control over how money is managed than with a gift fund. It allows you to select, redirect, and sell funds, as market conditions change. But any transfer of funds can have negative tax consequences.
*An education IRA. Interest earnings can be tax-free at the time of withdrawal if used for educational purposes. Unfortunately, annual contributions are limited to only $500 and are not tax deductible.
*529 investment plans. This savings approach lets you put assets in state-run college programs. The money grows tax deferred. When it is withdrawn, it is taxed at the child's tax rate, which is usually lower than the adult rate.
While some 529 plans are good, many are quite restrictive, says David Caruso, a financial consultant in Manchester-By-the Sea, Mass.
One plan that has drawn attention recently is the UNIQUE plan, developed by Fidelity Investments and the states of New Hampshire, Delaware and Massachusetts. These plans allow you to save money for use at any post-secondary institution in the US. And, unlike some 529 plans, you do not have to reside in the state where the plan is established. Earnings grow tax deferred, until withdrawn, and they are taxed at the student's rate.
Annual contribution levels are high, in the case of the New Hampshire plan, for example, at slightly over $105,000 for 1999.
What's important to recognize is that you don't have to use a fund advertised as a college-savings fund for your educational investing, says Scott Cooley, an analyst with financial-information firm Morningstar, Inc., Chicago. "You could always use a regular mutual fund, such as a solid growth fund, or a tax-managed fund," he says.
Under this approach you could set up a custodial account for the child, registering the fund in his or her name. But when the child reaches maturity, the child can take possession of the assets and use them for purposes other than college.
A way around that dilemma: Invest in a mutual fund in your own name, and then pay the tax bill as earnings are withdrawn, says Mr. Cooley. Under this approach, you keep control over the assets.
KNOWLEDGE ON SAVING FOR COLLEGE Financial experts stress the following when searching out mutual funds for you child's education:
* Look for established funds and fund companies that you anticipate will be around for the long haul.
* Seek out growth funds, if you have a time horizon of ten years or more.
* Don't buy into a fund just because it is advertised as a college savings fund.
* Avoid funds that lock you in to a fixed rate of return or a set time frame before you can withdraw earnings. Many investors have been burned by such funds, earning low returns at a time when the market has soared.
* Be careful when setting up a trust fund in a child's name. The money may later dis-qualify the child for college aid, which is typically linked to need.
* If the child is very young, take your time setting up a college fund. It may also pay in the long run for you to consult a financial planner.
(c) Copyright 1999. The Christian Science Publishing Society