for your retirement if you’re self-employed.
In the paragraphs below, we’ll list the advantages and rules that govern each, so that you’ll best find your way through the new array of IRAs. First, however, we’ll spell out some of the basics behind the traditional, deductible IRA account. But you’ll find that much of this background applies to the entire lot of IRAs.
Typically, you can open any type of IRA account at a variety of financial institutions, including banks, brokerages and mutual fund companies, or through a financial planner. You’ll likely be assessed an annual fee, which, while minimal, should be taken into account. Financial planner Reuben D. Brown of American Express Financial Advisors in San Francisco say IRAs typically charge $25-$50 a year, but once your balance reaches $20,000-$25,000 fees are often waived.
Los Angeles certified financial planner Percy Bolton recommends that clients use discount brokers for IRAs. “You can invest in almost anything through a discount broker. With some banks, you’re limited to their proprietary products.” To sweeten the deal, Bolton says, discount brokers generally offer reasonable fees for IRAs. Charles Schwab, for example, has a no-fee policy for IRA accounts with a balance of at least $10,000; for smaller IRAs it charges $29 per year.
One thing to remember is that the money you put into an IRA is under your direction. That means you decide how the money is invested either in an interest–bearing account, stock or bond mutual funds, or individual stocks. The only limit to your creativity is what the institution holding your account allows you to do as well as certain IRS restrictions. What’s more, you can move money among various investments whenever you wish without penalty. No matter what you do, you won’t owe any tax as long as the money stays inside your IRA.
Withdrawals from your IRA, however, can be taxing. If you fund your IRA strictly with deductible contributions, every penny that is removed before age 59 1/2 will be taxed at your regular tax rate by the IRS, and perhaps by state and local tax collectors as well. What’s more, says Richard Peace, a financial planner with Advantage Capital in Colorado Springs, Colorado, “You may get bumped into a higher tax bracket because of your taxable IRA income.” And, the IRS more likely than not will slap a 10% penalty on any money you take out.
There are times, though, when you needn’t face the IRS’s wrath. Beginning this year, if you’re out of work for at least 12 consecutive weeks, you can take enough money from your IRA penalty-free to pay your health insurance premiums. And, you can continue the withdrawals for up to 60 days after you’ve returned to work. Early withdrawals will also escape IRS penalties if the money is used for higher education or for the purchase of a first home, says Joan Vines, national director of employee benefits tax services in the Washington, D.C., office of Grant Thornton.
THE NEW LINEUP FOR ’98
Now that you have some of the