PF QUESTIONS. A selection of responses to readers' financial questions

Q:Is it true that we can now start using United States Savings Bonds to save for college? I heard the law has been changed to allow this. A:The law has indeed been changed, but you can't take advantage of it just yet.

Under the Technical Corrections Act of 1988, which amended the Tax Reform Act of 1986, Series EE bonds can be bought for a child's education and earn interest free from federal and state taxes.

In recent years, savings bonds have gotten to be a better deal, with the government paying a rate that is 85 percent of the current rate on Treasury securities. The savings bond rate is changed every six months. Because they couldn't be used tax-free for college, however, Savings Bonds usually weren't as good a deal as certificates of deposit. With a CD, you can often get a better after-tax return than you cold with one of the bonds.

But add in the tax-free feature and savings bonds become much more competitive.

You'll have to wait until December 1989 to start buying Savings Bonds for college, however. That's how long Congress gave the Treasury Department to work out the regulations for registering the new instruments.

Q:With all the stories about bank failures, I'm worried about the safety of my money. Yet I hear people recommending money market mutual funds, which aren't even federally insured. Are these a good idea?

A:The answer depends on how you feel about federal insurance. If you can't sleep at night without knowing your money is protected by the US government, then you should stick with federally insured banks or thrifts. But don't chase the highest yield; find a stable institution with the other services you want, perhaps one that will give you free checking or a free credit card if you buy its certificates of deposit.

But remember, while some banks and thrifts have failed and some depositors have at least not been able to get to their money for a few days, there have been only two cases of money fund problems; one was in 1978, before industry reforms, and another was in 1980, and its sponsors, including Salomon Brothers, stepped in to protect investors.

Because money funds aren't insured by the federal government, one could argue that they're theoretically even safer, since their managers don't have the federal ``safety net'' to protect them and their customers from mistakes and mismanagement.

Still, there are some risks to money funds. In a time of falling interest rates, their yields can plummet, while money in a bank CD will keep its yield until maturity. On the other hand, when rates are generally rising - which they seem to be lately - money funds can keep up, while CDs are locked in to the old rate.

Speaking of rates, don't look for the highest money fund yield you can find. Pick a fund that offers other reasons to invest, like the ability to switch from a money fund to other funds in the family, such as stock or bond funds. Several major funds, including Colonial, Fidelity, Kemper, Massachusetts Financial Services, Putnam, T.Rowe Price, and Vanguard, are examples of companies with good reputations that offer money funds and these other services.

Q:My income tax situation has gotten too complicated to do myself this year. I'd rather not go to one of the national tax-preparing companies, so do I have to go to a CPA?

A:Not necessarily. You can go to a certified public accountant, but be sure to use one who is experienced in tax matters. Not all are. You can all go to a tax preparing firm that specializes in your type of profession or investments. To find one of these, ask friends, relatives, or co-workers who have similar tax situations about whom they use.

If you think your taxes are going to involve complex legal questions, you might want to go to a tax attorney. These people often work on their own, or they may be on the staff of major accounting firms.

There is also a group of professionals known as enrolled agents. They are similar to tax preparers, but they have to pass a rigid Internal Revenue Service exam before they can put ``EA'' after their names.

Also, while any tax preparer can accompany you on an IRS audit (and all should be willing to), only CPAs, tax attorneys, and enrolled agents can go to an audit without you. If you think you might be too nervous in the presence of the IRS agent, you might prefer to have one of these three types of professionals on your side.

Q:My broker has suggested that I use some of the mutal fund shares I brought from him as collateral to open a margin account. I didn't know I could do this. Is it a good idea?

A:Yes you can do it. Whether you should is another matter.

Not too long ago, the Securities and Exchange Commission repealed a rule that prohibited the use of mutual fund shares as collateral for margin accounts. So some brokers, like yours, have been suggesting this to their clients, although more brokers will probably try it when average investors have more interest in the stock market.

As to whether you should follow the broker's advice, that depends on how you feel about margin accounts and your reasons for investing in mutual funds. If you don't have a high tolerance for risk, and don't like the idea of ever getting a ``margin call'' to cover immediately any losses, you should stay away from this and all use of margin.

Also, if you're investing in mutual funds for a serious, long-term purpose, like college or retirement, you probably won't want to risk those fund shares.

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