Question: Recently I purchased an annuity through a life insurance company with my husband as primary beneficiary and my granddaughter as secondary beneficiary. My purpose was to provide her with money for college expenses in about eight years. I think I read somewhere that if I withdraw the interest and use it for education or health purposes it is not taxable. The agent who sold me the annuity knows nothing of this. Am I correct?

Answer: You're confusing two different tax structures--income tax and gift tax. Any earned interest withdrawn from the annuity account is subject to income tax in the year withdrawn.

But under ERTA (the Economic Recovery Tax Act of 1981) you can claim an unlimited gift tax exclusion for money paid on behalf of another directly to an educational institution for tuition or to a medical facility for health care.

There is an income tax break available to you under the circumstances you describe--and your agent should have explained it to you.

You are permitted to withdraw any part of the principal amount, up to the total originally paid in, without income tax liability--because that initial payment was made with after-tax dollars.

So when your granddaughter starts college you can take money from the account without paying income tax until you have withdrawn a sum equal to your initial investment in the annuity. (Be sure to specify "principal withdrawal" when you request the money from the company.)

If you pay the tuition costs directly to her college, or if the total given to her during any one year does not exceed $10,000 ($20,000 if your husband concurs the gift), there will be no gift tax liability either.

When you have exhausted the principal amount, subsequent withdrawals from accrued earnings will be subject to income tax. But if you don't need the money then, you can leave those accrued earnings with the company to continue earning interest, without tax consequnces until withdrawn.

According to Benjamin C. Korschot, chairman of the Investment Company Institute (national association of mutual fund sponsors), the number of IRAs using mutual funds increased from 500,000 at the end of 1981 to 1.2 million by March 31 of this year.

A substantial number of companies, large and small--and including more than 50 of the Fortune 500 companies--are offering payroll deduction plans to their employes with mutual funds as one of the invetment options available.

But this spurt in mutual fund IRAs did not come painlessly or inexpensively. I spent some time recently with Rab Bertelsen, assistant vice president at Fidelity Group, sponsors of one of the major families of funds.

He told me of the tremendous (and expensive) educational job done by Fidelity, and certainly duplicated by the other big fund houses, in trying to open the corporate door to mutual funds for IRA payroll deduction plans.

And it wasn't pitched only at the corporate personnel people. Literally hundreds of thousands of informational pieces were made available to the companies for distribution to their employes.

Payroll deduction is probably the best way to insure that payments get into your IRA regularly. For most of us it's less painful to adjust to a slightly smaller paycheck than to send off a check from the money you've already received.

Disadvantage: You lose the tax benefit that would be available if you were to deposit the entire amount of your annual contribution early in the year.

In spite of that, payroll deduction is a good way to build your IRA account, and one you should consider seriously if your employer offers the opportunity.

Oops! Last week I wrote that you may no longer make contributions to a Keogh or IRA after reaching age 70 1/2. This was right for IRAs--but wrong for Keogh plans.

It is true that withdrawals from either program must begin in the year in which you reach 70 1/2. But even while you are required to withdraw funds from your Keogh program you can continue to make new contributions based on current earnings from self-employment.

The annual withdrawals are reportable as taxable income; contributions are deductible from income. So to the extent that the figures match you can end up with a "wash."