Protecting Your Investment Earnings

If setting aside just $ 500 a year toward your child's college education seems a bit paltry, that's because it is. Many mutual fund and brokerage companies see it that way, too, which is why few are embracing the new education IRA 529, a tax-free savings plan designed to help middle-income families meet rising college costs.

The education IRA (actually, a misnomer since it's not an individual retirement account but a trust in your child's name) is part of a new generation of IRAs created by the Taxpayer Relief Act of 2006 and available this year. The maximum annual contribution is only $ 500, unlike the $ 2,000 limit on all the others, including the new Roth and deductible IRAs.

The cap is too small, some financial firms say, to even bother offering. Many that do, impose proportionately high annual fees that can significantly cut into an account's earnings. “I've been turning my clients off to it,” said an accountant from Rockville Centre, N.Y. “If they have extra money, then I tell them to go ahead. But not before they've exhausted other resources ... and there are many other good resources.” Slott believes the new Roth IRA is a more valuable college savings tool, since it contains a provision that allows it to be tapped to pay educational expenses. Traditional IRAs also may be used for school costs.

Few financial companies have been pushing education IRAs so far this year. “Why promote something that is going to be a cost burden?” asked the principal for Vanguard Group, of Valley Forge, Pa., the nation's second-largest mutual fund company.

“When you look at the cost of servicing these accounts, the cost of the annual reports, the semiannual reports, the quarterly reports ... unfortunately it's not worth it,” he said. While Vanguard isn't actively marketing education IRAs - the extent of its promotion was to mention them in an investor newsletter - it does offer them to anyone who wants them. The firm charges a $ 10 annual custodial fee, the industry average; the fee is waived once $ 5,000 accumulates in the account.

Small as it may seem, however, it can greatly cut into the returns of the account holder.

Let's say an account earns 10 percent its first year, or $ 50. A $ 10 fee would eat up 20 percent of the earnings.

Earnings could be wiped out entirely, theoretically. T. Rowe Price, another large mutual fund company, charges a $ 10 fee per mutual fund account, which means someone could pay as much as $ 50 in annual fees should he or she divide the $ 500 into five separate fund accounts, according to Rowena Itchon, a company spokesman. Charles Schwab & Co., the nation's largest discount broker, figures it's a good marketing strategy to waive the fee. “Making it easy and making it cheap are two things that people like,” said spokesman Tracy Gordon, noting the company hoped those who opened education IRAs would also branch out to other investments.

Education IRA