Thursday, May 28, 1998

Appreciating gifts for the graduate

By VIVIAN MARINO / AP Business Writer

NEW YORK (AP) -- Looking for that special gift to give a high school or college graduate? Think three letters, for starters.

No, not C-A-R. I-R-A, as in Individual Retirement Account.

At least that's what some financial advisers are suggesting for those searching for something that can make a difference in the life of a young person starting out.

IRAs, though, are just one of many financial gifts to consider.

There are stocks and bonds, mutual fund shares, savings accounts, even contributions toward school tuition or college debt reduction. Those on tighter budgets can give financial software, books or publications that help teach budgeting and investing skills.

Granted, the new grad's eyes may not light up as they would at the sight of a convertible. But most cars don't appreciate in value; most investments do, the advisers point out.

"I think more parents and grandparents ... want to give a gift they feel will benefit in the long run," said John Michel, first vice president and director of Next Generation marketing for Merrill Lynch.

Merrill Lynch is one of several financial companies promoting the IRA gift concept. "With the passage of the new tax law, Merrill Lynch has seen a lot of interest ... IRA assets can now be used for higher education expenses," notes spokesman Wendell Wood Collins.

There are essentially three types: deductible, Roth and education.

Anyone with taxable earned income can open the first two, and most working grads are likely to meet maximum income requirements. Both deductible and Roth IRAs allow for penalty-free withdrawals for qualified education expenses.

The maximum contribution is $2,000, or less depending on income. (Those earning under $2,000 can only make a maximum contribution equal to their total annual earnings.)

Parents, grandparents or other close relatives and friends can "gift" that amount or a portion thereof.

They also can help set up an education IRA on behalf of the young person, provided they meet income requirements. The maximum annual contribution is $500 per child under age 18. Withdrawals are tax-free if used for education.

Mutual fund shares are another option, especially those carrying no loads, or sales commissions. The minimum amount to open an account varies, with some starting as low as $250 and others ten times that amount.

Some funds, however, may waive the minimum, provided the investor agrees to kick in a certain amount automatically each month until the account reaches a specified amount. A few fund groups may even let you purchase something like gift certificates, which the investor can use to choose from among the family of funds.

Individual stocks also can be bought and put in the student's name, specifically equities likely to grow sharply over a period of years.

While it may be expensive to buy just a few shares, gift givers may find a discount broker or strike a deal with a full-service broker, perhaps one they already use, to help keep costs down.

Bonds -- municipal, Treasuries or corporates -- are probably too pricey to buy individually, which is why bond funds usually make more sense.

EE savings bonds, on the other hand, can be purchased for as little as $25, or half the face value of a $50 bond. Although they're an ultra-safe investment, they yield considerably less than most individual stocks and bonds, which is why some advisers try to steer clients away from them.

"The biggest risk for an investment is not loss of principal. It's loss of purchasing power ... if the yield is too low that it can't keep pace with inflation," said Hank Madden, who runs Madden and Associates Financial Consultants in Jacksonville, Fla.

One way to increase purchasing power is to reduce debt, which is something many college grads have accumulated after four years and high school grads now face.

A parent or grandparent may offer help in this situation. Madden suggests even working out a plan to match a portion of the student's savings dollar-for-dollar for that purpose.

"You can put a string attached to it and say I will match a certain amount over a period of time," he said. "It gives them (the children) an incentive to be financially prudent."

But he cautions against making outright payments of debts, particularly credit cards.

"That's the worse thing you can do. They won't learn very valuable life experiences if you pay off their debt," Madden said. "The only exception I would make would be for the child who has demonstrated to be financially responsible, who has managed an allowance and got good grades at school."