Halal Investing For Education
Investing to Educate your Children the Shari'ah Compliant Way
Iqra... meaning "Recite" was the first word revealed of the Qur'an. Islam requires everyone to seek knowledge and become educated. The Prophet Muhammad (Peace be upon him) is reported to have encouraged by saying,
metaphorically, "Seek knowledge, even in China".
The education of our children is something we consider our obligation. We look forward to it with optimism but also with apprehension. Skyrocketing tuition, far outpacing inflation, has made it necessary to plan well ahead for
these expected costs. But what are the options? And how should one go about planning and investing for their children? The Iman Fund aims to empower its investors to be prepared for the education of the future
generation while upholding their beliefs.
The Daunting Numbers
College tuitions today can exceed $40,000 per year in annual education expenses, and are continuing to rise. While the figure may seem daunting, there is no need to despair. The following chart illustrates how much you can save
through investing monthly from when a child is born until they enter college at age 182 :
| Monthly Investment |
Average Rate of Return3 |
Size of Portfolio
at Age 18 |
| $166 |
5% |
$57,968 |
| $166 |
10% |
$99,693 |
| $333 |
5% |
$116,284 |
| $333 |
10% |
$199,988 |
The figures calculated are based on a hypothetical scenario. The performance shown is not indicative of any particular investment. Actual results will vary.
As you can see, planning and saving for your children's education can be a manageable task. Investing a few hundred dollars a month with a long term strategy could yield the results you need to ensure your children get the education
you want for them.
Since a periodic investment plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his/her financial ability to continue purchases through periods
of low price levels. Such a plan does not assure a profit and does not protect against a loss in declining markets.
The Options
Coverdell Education Savings Accounts
Formerly known as Education IRAs, Coverdell Education Savings Accounts (CESA) provide tax free growth and flexible distribution options. A CESA can be opened for anyone and funded up to the maximum yearly contribution allowed,
currently $2000. The assets in a CESA grow untaxed until they are withdrawn and used for qualifying education expenses. Now, qualifying education expenses have been expanded to include elementary and secondary education expenses at
accredited institutions as well as internet access and computers. This means you can even invest to pay for your children to attend Islamic school.4. CESAs can also be transferred from one child to another. This is
especially useful in the event one of your children earns a full scholarship or has no need for the assets to pay for education expenses. Contributions to a CESA can be made by parents as well as relatives and friends for the
benefit
of the child.
Roth IRA
The Roth IRA is a retirement account. But did you know that the assets in a Roth IRA can also be withdrawn without penalty or taxes to pay for education expenses? Similar to a CESA, the Roth offers tax free growth with flexible
distribution options. Also, if a youngster has a summer job while in school, it maybe to their advantage to immediately invest in a Roth, which requires earned income in order to make contributions.
Gift to Minors Accounts
These accounts are for assets controlled by the parent in the name of the child. While they do not offer the tax free growth of the above mentioned accounts, there is a greater flexibility as to what the assets can be used for. For
example, distributions from a gift to minors account can be used to purchase a car for a child with lesser tax consequences, while with a Roth or CESA they may be subject to penalties and taxes, as such a distribution does not fit
under qualifying education expenses.
The plan
The keys to planning for your children's future are as follows:
- Develop and follow a regular and disciplined investment strategy. That way your goals will be explicit, your path clear, and achievement attainable.
- Diversification is a key characteristic of any portfolio. While some sectors may outperform the market in the short term, they may lag in the long term. A diverse portfolio will blend the overachievers with the underachievers
to help lower risk and market returns.
- Market fluctuations are natural. Market timing is a strategy that can be met with failure; you miss the beginning of the upside or the downside. Instead, with a regular investment plan, dollar cost averaging can be achieved
through your consistent investments. This may help provide stability in your portfolio and investment no matter how the market rides.
- The Iman Fund provides low cost diversification that is Shari'ah compliant. We offer flexible investing solutions, convenient purchase and redemption options, and a dedication to excellence.
Since a periodic investment plan involves continuous investment in securities regardless of fluctuating price levels of such securities, the investor should consider his/her financial ability to continue purchases through
periods of low price levels. Such a plan does not assure a profit and does not protect against a loss in declining markets.
College Savings Resources
Clicking on the links below will take you to a third party site. The Iman Fund is not responsible for the content, nor does it sponsor any information provided on a third party site.
www.collegeboard.com
www.savingforcollege.com
www.smartmoney.com/college
www.irs.gov
It Pays To Start Early
Click here for a copy of the Coverdell Education Savings Account Application.
1 Taken from the College Board.
2 Excludes inflation
3 Hypothetical average rates of return
4 The school must be accredited in order to be a qualifying education expense.
Mutual fund investing involves risk; principal loss is possible.
