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Disappointed, father considers scrapping education IRA

Q. My wife and I opened an education IRA in 1999 for our daughter, who is 3. It has yet to post a gain. I'm beginning to become frustrated with this investment because it loses money each quarter. Should I continue to contribute my $500 a year or cash out and try another savings instrument to help with my daughter's college expenses? It seems college tuitions are increasing exponentially every year.

A. You have plenty of company. Lots of people, including me, get the same sinking feeling when we look at the statements for our investments.

The problem is not the education IRA, which is now known as the Coverdell Education Savings Account. An IRA/ESA is merely a tax-deferred wrapper around an investment, usually a mutual fund. Unfortunately, stocks and stock funds have been a lousy place to have your money the past two years.

The question to ask yourself is whether you want to stick with stocks or go for an investment that offers less potential for returns but guarantees your principal. I think that over the long run, stocks will prove to be a good investment. Because your daughter is only 3, odds are that her fund will be in much better shape by the time she needs it. But the stock market comes with no guarantees, so it is not a good idea to have your daughter's entire college fund riding on its success.

If I were in your shoes, I would keep some of my college savings in stock mutual funds, but balance that with a safer investment such as the Florida Prepaid College Program or savings bonds. Both offer tax breaks for college savings.

For a 3-year-old, Florida sells a prepaid program to cover tuition and fees at a state university for a lump sum of $9,580 or two years at a community college followed by two at a university for $7,284. Monthly payment plans also are available.

Starting next year you also will have the option of making larger contributions to your daughter's Education Savings Account as the maximum contribution increases to $2,000. The accounts also will become more flexible, permitting tax-free withdrawals to pay private school tuition for children younger than college age.

Q. I recently left my job and have been given the option of leaving my 401(k) plan with my former employer. I have been happy with the plan, but some people say I should roll it over to an IRA. What should I consider other than the quality of the investments?

A. Many people prefer IRAs because they offer greater flexibility and greater control over investments and withdrawals. Many company plans have limited investment options and some make it tough to get access to your money. On the other hand, you can start penalty-free withdrawals from a company plan at age 55 if you have left the company, but you have to be 59{ to get your money out of the IRA without paying a 10 percent penalty.

IRAs offer advantages for estate planning, particularly if your beneficiaries are interested in stretching out distributions over their lifetimes. Company plans offer income tax advantages if your account contains after-tax contributions or appreciated company stock.

Are you expecting to get another job? If so, you might want to wait and roll over your plan to your new company. Workers who stay on the job past 70{ can delay the start of withdrawals from company plans. The longer you delay the withdrawals, the longer you delay the income taxes.

If you have a large account, consult a tax adviser for an individual analysis before making an irrevocable decision you might later regret.

Online money map

Uncle Sam might be looking for you if you moved after filing your last tax return. The IRS says it has been unable to deliver thousands of checks this year, including those made out to 3,828 Tampa Bay area taxpayers who are due rebates and another 917 who are due refunds. Tax Analysts (www.tax.org) offers a searchable list of the names. Click on "Does the IRS owe you money?" to find out if you are one of the lucky ones.

_ Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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