Why Some Do Not Offer Educational IRAsThe new Education IRA contribution limits tests poorly in math. Limited to an annual contribution of $500, its small size puts at a big disadvantage a saver who must pay an annual maintenance fee for the account. And an aggressive mutual fund company that charges no fee for such accounts will lose on administrative costs. "The Education IRA is a good idea," said a financial planner from Whitefish Bay, "But the fees are going to kill it. I have sympathy for the mutual fund company, because they can't make money on a low-fee or no-fee account." Even a modest annual fee of $10 would require a 2% return before any money was made on a $500 account, pointed out a financial planner and CPA in Glendale. And if a $500 account earned $25, or 5%, then a $10 fee would be the equivalent of a 40% tax on its earnings, most likely higher than the tax bracket of the child for whose benefit the account was begun. Created under the tax law passed last year, an Education IRA allows money to be accumulated on a tax-free basis to pay for the higher-education expenses of tuition, fees, books, supplies and equipment. Money put in an Education IRA is not deductible, but no taxes are paid on withdrawals if they are used for the allowable expenses. A person with an adjusted gross income of less than $110,000, or a married couple filing jointly with an adjusted gross income of less than $160,000, can establish Education IRAs for as many people as they like. Withdrawals from an Education IRA must be coordinated with two other creations of the new tax act the Hope scholarship and lifetime learning tax credits to maximize benefits, Arnow and Hogan pointed out. And savers can't have a contribution made to an Education IRA in the same year money is put in a prepaid state tuition program in their name. In Wisconsin, the prepaid program is called EdVest. But even with all those restrictions, "the Education IRA makes a whole lot of sense for anybody who has a child under 18," Arnow said. As to the cost, he noted that if the fee stays the same, it gets less and less important as the account grows. A $10 fee is 1% of a $1,000 account, he pointed out. He suggests finding a good balanced mutual fund for the money. "I call them amnesia funds, because you can put your money in and forget it," he said. Hogan estimates that if an Education IRA is established when a child is born and a $500 contribution is made every year, "if there is a decent return, it will accumulate one year of college tuition in a tax-sheltered way." Even so, some large mutual fund companies do not yet offer Education IRAs. That includes Stein Roe & Farnham Inc., a mutual fund and money management firm in Chicago that oversees about $27.5 billion in assets. "We were kind of hoping and waiting to see what Congress would do," said Stein Roe spokeswoman Marilyn Morrison. "We would prefer the contribution level to be $2,500 rather than $500." However, with no realistic prospect of such a change coming soon, she said that Stein Roe intends to offer Education IRAs by the end of March in all of its 18 mutual funds, including its Young Investor Fund, which is marketed especially for children. |