CATS and TIGRS good fund-builders for a college kitty

At most colleges, you can't have a pet in the dorm. This includes birds, gerbils, dogs, and cats. Well, there is one breed of cat that many college administrators would like to see more of. These are CATS, or Certificates of Accrual on Treasury Securities, and they could help a lot of families find the money they need to send their children to college.

CATS, along with other acronym-named financial products, like TIGRS (Treasury Investment Growth Receipts), have been generating a good deal of interest among investors since they were introduced a year or so ago. They are packages of zero-coupon certificates sold in $1,000 denominations. With a zero-coupon bond, you receive no interest payments through the life of the bond, which is purchased at a deep discount from face value. So, for example, $10,000 invested in CATS now could yield about $99,000 in 20 years, assuming a 12.1 percent interest rate.

That may be just about enough to meet those costs by then. The yearly college tuition bill alone for a child born this year is estimated to be at least $45, 000 for a public university and $140,000 to $180,000 for a private institution, according to forecasts by the accounting firm of Coopers & Lybrand.

Such forecasts have made zero-coupon bonds seem like a good way to meet these expenses. But there have been a few cautions about them, some of which are addressed by these feline investments.

Because TIGRS and CATS consist of US Treasury bills, notes, and bonds, they are fully backed by the US government. This eliminates one objection to zero-coupon bonds sometimes issued by corporations and municipalities: that they are not secure enough for long-term investment, especially when the goal is as important as retirement or college saving.

There is another word of caution that still applies here, though. The Internal Revenue Service considers the interest earned on zero-coupon bonds as taxable income each year you hold the bond, even though you don't see any of the income until maturity. This ''phantom income'' problem is almost eliminated, however, when the zeros or CATS are in the child's name and placed in something like a Uniform Gift to Minors Act account.

Even though CATS have been prowling the financial markets for a fairly short time, they are already beginning to breed some offspring.

One of the first, ''College CATS,'' was recently introduced by the Advest brokerage in Hartford, Conn. The idea here is that a parent or grandparent can invest a certain amount for each of four years and let the money wait until the child needs it for college. For example, says Gerald Guild, manager of fixed-income securities at Advest, $2,500 invested in CATS in each of the next four years would yield $21,000 annually from the years 2002 to 2006.

''Many parents don't have the extra money to do this,'' Mr. Guild acknowledges. ''But grandparents often do.'' In addition, the $10,000 limit on tax-free gifts means a grandmother and grandfather could each give the grandchild $10,000 a year without having to pay gift taxes. If done at an early enough point in the child's life, ''this would pretty much guarantee a kid's ability to pay for college,'' Guild says.

Although Advest prefers to sell its College CATS in $3,000 increments, he said, they can be sold in multiples of $1,000.

In many families, enough money has been saved to see the children through four years of college. Then one day, the 14-year-old comes home and announces she wants to be a lawyer or an architect. Suddenly the parents are faced with paying for three or four years of postgraduate education. College CATS can help here, too, Guild says. An investment of $5,000 a year for the next two years will yield $21,000 for graduate school in the 1990-91 school year.

No IRAs for nonworkers

Although I am not working, I do have $2,000 I could invest in an individual retirement account. How can I qualify to put money in an IRA? - P. S.

As you seem to be aware, you must have ''earned'' income to qualify for an IRA contribution. It doesn't matter if you are working for yourself or for someone else, as long as you earned at least $2,000. (If you are self-employed, you can also set up a Keogh account, which has higher contribution limits.)

If you have any job experience that could be used on a short-term basis by some company, you may be able to earn some extra income with a little part-time work, or you could set yourself up as a consultant. In either case, of course, you'll have file a tax return to report the income.

If neither is not possible, and you still want to salt away that $2,000, there are some alternatives to the IRA that may be useful. You might, for example, look into the possibility of a variable annuity from an insurance company. Although you must invest after-tax dollars, you can start with a very small amount (say, $25) or a large lump sum, such as the $2,000 you have in mind.

Until you start making withdrawals, earnings are tax-deferred. Withdrawals can start anytime without penalty after 10 years or after age 591/2, whichever comes first.

Shop around carefully before taking any one annuity. You will find a wide variety of sales charges, management fees, and early-withdrawal penalties, as well as different payout plans and schedules.

If an annuity doesn't suit you, look into municipal bond funds or tax-exempt money market funds. Check your tax bracket, though; if it is not high enough, tax exempts won't do you any good.If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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