TAKE THEIR MONEY — PLEASE! JUST TRY TO OPEN AN EDUCATION IRA

Nobody wants to sell Kay Disbro an education IRA.

About a month ago, the 77-year-old Mentor, Ohio, resident looked at the two $1,000 bank savings accounts she’d set up for her grandchildren’s college education and thought she could do better than the paltry 3% return they were producing.

Simple, said Karen Spero, Ms. Disbro’s investment adviser. Try the new education savings vehicle, which like a Roth individual retirement account allows tax-free accumulation and withdrawals.

But a month later, a frustrated Ms. Spero has found it isn’t so simple after all: Numerous mutual-fund companies told her that they would set up an education IRA only for a parent or a guardian, although a grandparent could fund it.

She ended up putting the $2,000 in two taxable mutual fund accounts at Charles Schwab & Co. — which also had refused to set up an education IRA. “I threw up my hands,” says Ms. Spero, of Cleveland-based Spero-Smith Investment Advisers Inc., which oversees $215 million in assets. “I think it’s kind of silly and unfortunate that (the industry) is making this so difficult. Because it doesn’t need to be difficult.”

The education IRA — which allows investments of as much as $500 a year per child to grow and be withdrawn tax-free so long as they’re used for college expenses — is proving to be tough for everyone, investors and investment companies alike, to figure out.

Nothing in the law, or in Internal Revenue Service regulations, restricts who can set up an education IRA for a child. But mutual-fund industry officials, saying they’re fearful that parents will be burned if relatives unwittingly establish duplicate accounts for the same child, have insisted that only parents establish and control the accounts.

Some advisers, however, suspect another motivation: Fund groups want to discourage too many education IRAs because the small size of the accounts makes them costly to administer. Indeed, American Express has yet to launch an education IRA and.Fidelity, the nation’s No. 1 fund company, is just now doing so.

“I think it’s an expense issue,” says Judy Shine, an Englewood, Colo., financial planner whose firm, Shine Investment Advisory Services Inc., supervises $135 million. “If there’s no profit in it, you have to ask yourself why you’re doing it.”

Help may be on the way, but it could take a while. Both houses of Congress this month voted, mostly along party lines, to approve legislation that would expand the education IRA so that families could save up to $2,000 a year on a tax-sheltered basis for high school, middle school and elementary education. But President Clinton has vowed to veto the Republican-sponsored plan.

indirect is ok

Grandma or Grandpa can fund education IRAs indirectly. Indeed, the accounts are available even for the kids of parents whose incomes exceed the $95,000-$110,000 phaseout the law establishes for individuals, so long as the relative or friend providing the money qualifies.

But those relatives or friends who, for whatever reason, want to keep control of the account and make sure the money’s there when the kids need it are out of luck.

Ms. Disbro is one of those. When she started her quest, she had her bank write two checks for $500 each and took them to Schwab. Schwab initially set up the education IRAs, but two weeks later returned the money.

“They probably thought I was the mother,” Ms. Disbro says. “I don’t know how they found out I was the grandmother.”

Then Ms. Spero called several fund companies before T. Rowe Price Associates of Baltimore eventually agreed to set up an account for Ms. Disbro. (The Baltimore-based fund firm says its policy normally is to restrict the accounts to parents or guardians.) But when Ms. Spero saw that T. Rowe charges $10 a year for each account, she returned to Schwab and simply split the $1,000 between two taxable growth-and-income mutual funds.

“I took the check back to the bank (for a second time),” Ms. Disbro says. “They were beginning to think I was losing my mind.”

Mutual fund executives say they can understand the frustration of someone like Ms. Disbro, but emphasize that grandparents, or anyone else, are free to fund education IRAs through the back door, as long as they’re willing to cede control of the account to the parents.

“It’s a little clumsy, perhaps,” allows Larry Tabak, vice president of Madison, Wis.-based Mosaic Funds, which has made college funding the centerpiece of its marketing campaign. “Nevertheless, it makes some common sense that the parent or guardian should have control over that account.

“I wish that the college savings program was simpler and clearer and that Congress had done a better job delineating it.”

But, he adds, “Think of all the hoops people go through to get tax loopholes. This is not that big a hoop.”

Fund officials say they’re looking after the parents’ interest. If just anyone could establish an education IRA for a child, they say, think how easy it would be to unknowingly set up more than one, incurring penalties for exceeding the $500 annual contribution limit.

“It is really an issue of how you structure them so the ultimate beneficiary doesn’t have a quagmire of problems down the road,” says Schwab spokesman Greg Gable.

Indeed, many fund companies have struggled with that question. For example, Fidelity Investments debated earlier this year whether even to offer an education IRA before finally deciding it would. But they have been allowed for six months now, and the Boston behemoth isn’t close to rolling one out.

Minneapolis-based American Express Financial Advisors is finally launching its education IRA Wednesday.

Others, like Kansas City-based American Century Investments Inc. is offering the pint-sized accounts only to existing fund shareholders.

“It goes back to non-profitability,” says Kristy Vetter, manager of education services for American Century. “We definitely see this as a service to our shareholders.”

The accounts are loss leaders at best. In the first year, American Century, with a management fee of 80 basis points, makes all of $4 on a $500 education IRA. That covers maybe one toll-free call.

blames the government

“The government has designed a product that’s very tough to make money on,” American Century spokesman Chris Doyle says.

Mosaic’s $200 million funds have taken a different tack, requiring people to invest more than $500 for college savings. Under the Madison, Wis., company’s program, $100 is automatically withdrawn monthly from investors’ accounts, $41.66 of which is put in an education IRA (to keep it from exceeding $500), with the rest going to a taxable account.

The company, then, solves two problems at once. Parents won’t build near enough of a college nest egg with just $500 a year anyway, so requiring a $1,200 annual contribution helps there. And the company has a profitable item — which is important since about half its customer inquiries center on college savings.

“Some people are disappointed we won’t allow a $500 lump sum,” Mosaic’s Mr. Tabak says. “(They say,) ‘What do you mean you’re not? My money’s not green enough?’ ”

The bottom line, he says: “There’s nobody in the industry that wants a lot of $500 accounts.”