Congressional Research Service
The Library of Congress
INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)
Recent changes in the Nation's tax laws have made Individual
Retirement Accounts available to many people previously excluded.
Enclosed is general information on IRAs including material explaining these recent changes and their consequences.
Additional information on this subject, primarily in periodicals and newsDaDers., mav be found in a local library through the
use of indexes such as the Readers' Guide to periodical Literature,
Public Affairs Information Service Bulletin (PAIS), and the New
York Times Index.
We hope this information will be helpful.
Congressional Reference Division
COMPLIMENTS O F
Xi Wi 0
GOVICRNMENT P R I N T I N G OBFICI<:
This document has been printed for information purposes. It does not
offer flndings or recommendations by this committee
SPECIAL COMMITTEE ON AGING.
UNITED STATES SENATE
PREPARED BY T H E S T A F F O F T H E
AN INFORMATION P A P E R
A. GUIDE TO INDIVIDUAL RETIR,EMENT
Question. Do I have to put $2,000 in my IRA every year to keep it
Answer. No. There is no minimum contribution requirement.
()uestion. Mtiy I stagger my investment over the yenr?
Answer. Yes. Or the entire amount may be invested nt one time.
Contributions 13 nn IR.1 must be in the form of cash, check, or money
Ouestion. What is the cutoff date for contributions to the IRA each
Answer. Contributions may be mpde through the due date for your
income tax ~ e t u r ninclutling
extensions. For most people that date is
.Ipril 15 of the yew following the yeru when the income was earned.
(juestion. T h e n is the last date each yenr when I may set up an IRA?
Alnh\ver.The due date for filing your tax return, with extensions.
(Juestion.Where mny IRA money be invested?
Answer. IRA money mtty be investecl in such things as passbook
savings nccounts, certificates of da oslt, annuities, mutual funds
(including money market funds), i;PriYidurl stocks and bonds, find
certain kinds of red est'ate, such as lmtnitetl real estate investment.
Question. Are any investments forbidden?
Answer. Yes. Assets used to acquire a collectible are treated as
immediate distributions from the account and are taxed accordingly.
They may also be subject to penalties for premature distribution. Collectibles include works of art, nntiques, metals, stamps, coins, and
alcoholic beverages. Money invested in life insurance contracts generally docs not qualify for an IKA contribution. (Annuities do qualify.)
Question. Is there any limit on the number of IRA'S aperson may
Answer. No. But only a combined total of no more than 100 percent
of compensation or $2,000, whichever is less, may be invested each
year, no matter how many IRA'S are set up.
Question. Is there a penalty for putting more than the deductible
limit into an IRA in any one year?
Answer. Yes. An excise tax of 6 percent is levied on any amount
contributed beyond the deductible amount-unless the excess and
any earnings on the excess are taken out before the due date for filing
an income tax return for the year.
Qursiic,:i. 15 thcrc: loii.er or upper income limit for IRAZeligibility?
i1ns\vw. S o .
( j u ~ s t l o n Is
. there 11 lirn~ton the tmount of time 11 perzon must work
each yew to qrlulify for tin IJLI?
Question. Are part-time workers eligible?
A N IRA IXVESTMENT
Question. Do I pay any taxes on the money I put into an IRA each
Answer. No. That amount-the lesser of $2,000 or 100 percent of
taxable compensation for the year-is taken off the top of your
income and is not taxed until i t is distributed to you.
(juestion. At whut age may I open nn IRA?
Answer. There is no minimuni tge. You may not, however, deduct
payments you make to an IRA if you will be 70): before the end of
(Suestion. When may I withdraw money from my IRA?
Answe~.Normally, you mny start to withdraw your money a t age
59%. (Early wikhdmwals are permitted upon disability or death.)
(Suestion. Must my money be withd~awnby a certain age?
Answer. You must begin to receive payments from your account
before the end of the yenr in which you become 70)& whether you
are retired or not. You may not invest any money after you reach
70);. There is a heavy enalty for failing to make proper distribution
of the money. Work c osely on this with the institution where your
IRA is set up.
Question. How is the money in my IRA paid out to me?
Answer. The money can be paid out in various ways. You may take
the entire amount in a single payment between 59;h and the end of
the year during which you reach 705. Or you may elect to receive
the money in regular payments over a fixed period of time that is not
greater than the life expectancy or the combined life expectancy of
you and your spouse. Or you may choose an annuity that would
make regular payments for life or the combined lives of you and
your spouse. Payments must begin by the end of the tax year during
which you become 70:i.
IJuestion. iM:ly I move my I R A wcouut!
Answer. Yes, you may withtlr~twpart or d l of the assets from one
IR.2 and invest them in another IR*i, tax free. Thls is known as rt
Question. When must this investment be made?
Answer. Ry the 60th day after the day you receive the money
from your IRA.
Question. How often may I do this?
Answer. You must wait a t lenst 12 months between rollovers.
Question. Is there any way I may move my IRA from one institution to another more than once a year?
Answer. Yes. If the money does not pass through your hands but
is handled exclusively by the institutions involved, the transaction is
not considered u "rollover" and the 1-year waitling period does not
AGE ~ M I T AS N D WITHDRAWALS
The simplest way to invest your I R A dollars is in a passbook
But, financial institutions are also offering other IRA investments
with higher returns th&nthe passbook yavings rate.
What can an IRA do for you?
Take this example, developed by a financial organization:
You are ~ermitteda maximum investment of $2,000 a year in an
After 20 years, you would have $161,397 if you invested all $2,000
on January 1 every year at 12 percent simple interest, compounded
over 20 years.
After 40 years, the same investment would produce $1,718,285 and
would make you'a millionaire.
But let's kee things in perspective. You would still have a real
nest egg. But al owing, say, for inflation of 5 percent a year, 40 years
from now $1,718,285 would buy goods worth approximately $244,110
in 1981 dollars.
Question. Is interest or other money earned by my IRA taxed each
Answer. Money is not taxed as it accumulates in lour account.
There may be a few special exceptions to this.
Question. When is my IRA taxed?
Answer. When you withdraw money from your IRA, it is taxed as
ordinary income, unless you "roll it over," tax free, as described above.
There is a tax penalty if you withdraw money before you are age 59':.
A penalty-free withdrawal can be made upon disability or death.
Question. What is the penalty for withdrawing my money early?
Answer. The amount withdrawn will be taxed as ordinary income
and a 10 ercent adtlitionel tax will be charged on the amount withdrawn. TFle additional tax is nondeductible. This penalty does not
apply to an early withdrawd that is 'Lrolletlover," tax-free.
Question. Does my IRA become part of my estate after I die?
Answer. The remaining amount in yollr IRA is not subject to Federal
estate taxes if it is paid to your beneficiary during his or her lifetime
or during a period of at least 36 months. ITowever, a lump-sum
ayment to your beneficiary is included as part of your estate for
gederal tax purposes.
Question. How about gift taxes?
Answer. A distribution payable to a beneficiary will not be subject
to Federal gift taxes.
Question. Where can I get more information on IRA'S?
Answer. No matter where you live there will be a tax information
number in our telephone book. Look for it under United States Government, Tnternal Revenue Service. Call that number and ask for
Publication 590, Tax Information on Individual Retirement
Almost all credit unions will be offering IRA'S. They expect to pay
interest that is competitive with other financial institutions.
Credit unions are chartered by the Federal Goveinment or by
Every Federal credit union is free to decide what kind of IRA
it will have, inclutlin the interest it will pa . State-chartered credit
unions also will tleve op their own plans, alt ough some States have
Credit unions will design IRA'S keyed to their size an(! ntltr~re.
Interest will be set by the board of directors of t,he credlt union.
Some IRA'S will have no time limit. Others mtiy offer s~~vings
certificates with a time limit tint1 would chnrge t i pennlty for pretnt~tr~re
Banks are offering a variety of options on IRA'S that are patterned
after conventional certificates of deposlt but are far more flexible.
Even within the same bank more than one option may be available.
Conventional certificates of deposit require sizable initial payments.
But an IRA account can be opened with a modest amount, perhaps
$100. After that you can de osit as much as you like, whenever you
like, depenchng on the legal emit per year. You can even stop paying
and your account wlll remain active. Generally speaking, banks
won't charge maintenance costs.
The different options in IRA'S will revolve around the kind of
interest being offered, the amount of interest, and the length of time
of the certifichte.
Some IRA'S will have variable, or floating,
- interest rates. Others
will have fixed interest rntes.
Both rates generally will t,ake as their guide the rates of U S .
Government securities and other investments. This does not mean
the IRA necessarily will be aying the same amount as the securities.
I t could be paying more. &it the variable, or floating, mte, on the
IRA woultl fluctuate along with the security's fluctuations. Interest
on our account would be ad'ustetl regularly.
+he fixed rate rill stay t e same throughout the timespan of the
certificate, when new terms would be set.
Alt,hou h IRA certificates will have time limits of at least 18 months,
some ban s will renew IRA1swith variable interest rates automatically
if the customer wishes.
Your IRA robably won't have the same interest rate throughout
its lifetime. W en your certificate matures you can move your account
elsewhere if you are dissatisfied with the new terms proposed. But
the bank may charge a penalty if you move the money before the
A'ccounts in the vast majority of commercial and mutual savings
banks are federally insured up to $100,000. Others are not, but they
may be insured under your home State.
Banks, credit unions, savings and loan associations, insurance
companies, mutual funds, and Investment brokers all are courting the
Here is a rundown on options private financial institutions are
An IRA set up with an insurance company is an annuity.
An annuity uarantees you an income as long as you live. It is
the o d y IRA t%at can provide this guarantee.
Savings and loan associations will be offering a range of options
which are variations of conventional savings certificates that are
tailored especially for IRA's. Some savings and loans will offer
more than one option.
IRA's a t savings and loans will differ in the kind of interest offered,
in the rate of interest, anti in the length of time the savings certificate
Interest rates generally will be pegged to the rates of U.S. Government securities or other investments. Most savings and loan
associations will choose an interest rate that the customer can understand easily, such as the rates on Government securities that are
published regularly in newspapers.
This does not mean the interest rate must be the same as the rate
on the Government security. The savings and loan could be offering
higher or lower interest.
Some IRA'S will have a variable, or floating, interest rate that
will rise or fall when the rate changes on the security to which it is
pegged. Adjustments in the inkerest rate would be made regularly.
Other IRA'S will have fixed interest rates that will remain the
same during the time period of thc savings certificate, which could
be for 18 months or could run for several years.
Your IRA plan robably won't have the same interest rate throughout its lifetime. $hen your savings certificate matures you are free
to move your IRA elsewhere if you are not satisfied with the new
terms proposed. However, if you take your money out before the
certificate's maturity, the savings and loan association may charge a
Savings and loans generally require a modest deposit-for example,
as low as $10-when you open your account. After that you may
deposit what you like, when you like, as long as you don't exceed
the legal limit each year. You can even sto paying and your account will remain active. Maintenance genera ly will be free.
Accounts in the vast majority of savin s and loans are federally
insured up tu $100,000. Others are not, fk~tthey may be insured
under your home State.
A N D LOANASSOCIATIONS
Convenience is one of the t~ssetsof 11 credit union, nntl man
unions s i l l mt~xirniae convenience by offering ptlyrol~ (letL,"f%
fol their IRA's.
The initial tleposit requiretl qeneially n-odd be very Ion-, s ~ c h11%
$25 or Iehs. For those not trtklng titlvclntnge of ptiyroll tled\~ction,
ndtlitiont~ldeposits generally coultl be mcitle at m y ,time m t l in any
amount, ns long cis they don't exceed the legal limit each year. For
the most pnrt, no mthtennnce fees will be chnrgerl.
Accounts in Federal credit unions are federally insured up to
$100,000. Some State-chartered institutions also are federally insured. Others may be insured by the State for a comparable amount.
When you put your money in a mutual funtl you are buying shares
in a pool of money that is invested in securities chosen by professional
money mana ers.
The most amous type of mutual fund is the money market fund,
where money is invested in short-term securities and your rate of
return varies daily.
Other mutual funds invest in stocks and bonds.
Every mutual funtl is made up of a group of securities. There are
hundreds of mutual funds, designed to meet different objectives
Mntual funds do not uarantee a specific rate of return on your
investment. Some funds ave far outstripped increases in the Consumer Price Index. But it also is possible to lose money in a mutual
Mutual funds are known as load and no-load funds. The "load," or
charge, is a sales commission paid to a broker or sales agent for advice
and services. The sales charge usually is around 8.5 percent of the
cost of every purchase of shares in the fund.
Insu~.ancecomp?nies will tell you in the beginning what the fixed
minimum rate of interest will be on your money through the years.
The atlvantage i s . t h t ~ gunrant'eetl
interest is not subject to mnrket
fluctuations. This interest rate coultl be spelletl out in stages in your
policy. For example, the guaranteed rate could be relatively high in
the first or early years, and then lower for succeeding years.
On paper, the guaranteed rate of insurance companies has been
considerably lower in recent years than rates offered by other financial
institutions. In realit ,, insurance companies have been paying interest
!vhich is more than t e guaranteed rate ant1 is competitive m t h other
institutions. The only guaranteed rate, however, is the one spelled out
in the policy.
IRA's have flexible remiums. This means you can put as much
as you like in your I R a t any time, as long as you don't exceed t'he
maximum set b law each year. You can even stop paying and your
policy still \ d 1 e m force. Some companies will accept $50 or less as
an opening amount,.
Some companies are tailoring policies especially for IRA'S b
offering fixed interest annuities that have no '.front loads," whic
are sales cost's. Your entire invedment will be earning money for you.
But you can expect to pay sizable enalties if you withdraw your
money rematurel , particularly in t e early years of the policy. This
Maint.enance fees for IRA's will run around $20 or $25 a year.
Your fixed annuity also guarantees a rate upon which payments
t,o you mill be based. You can never get less, but you coultl get more.
Some insurance com anies will also on'er IRA'S t'hat do not have
guaranteed interest. T ey are called variable annuities. The value
of the annuity fluctuates, tlepentling on market condit:ons. They
generally will have sales costs.
Money in your annuity will not be federally insured, but State
agencies that regulate insurance companies emphasize safety and
diversit,y in investments.
POINTS TO CHECK
When it comes time to shop for your IRA, remember thb: It's a
buyer's market. Financial institutions are competing aggressively for
First of all, find out if your employer is accepting deductible, voluntary IRA-type contributions to a pension plan.
Brokers offer the widest range of IRA choices.
For example, brokers at investment firms can set up IRA'S in
The can arrange to put your I R A in a limited partnership built
aroun income-producing real estate.
They can help you select an annuity.
If you want to manage your own invesiments, they can help you
arrange for a self-directed individual ret~rementtrust that will qualify
as an IRA.
Investing in securities, however, carries the risk of loss as well
You may find that some IRA investments made through a broker
will have higher costs associated with them than other IRA'S have. A
broker will charge about 8.5 percent of the cost of every purchase of
shares in a mutual fund. Even in a self-directed IRA, you will pay a
broker's commission,when you buy or sell stock. Thefe also will be
some costs for establishing the plan and administering it.
In some cases, the kind of investment you select will require commitment to a specific investment, up to the limit of. the IRA. For
example, you could be required to invest $2,000 at one tune in a limited
real estate partnership.
Investments made through a brokerage firm are not insured against
loss due to normal market action. However, client accounts are insured
up to $500,000 against loss due to failure of the firm.
Generally speaking, shares in no-load funds are not purchased from
a broker. Money market funds, which are no-load funds, are an exception to this.
There is virtually no difference in the investments of no-load and
load funds. You must be given a prospectus spelling out the objectives
and terms of each fund.
You can move your IRA from one mutual fund to another as your
own investment objectives change. Generally, there are no charge
when you sell fund shares.
Some funds may require that you invest at least a minimum
amount-perhaps $100-every time you buy shares. Others require
Each year, there will be a management fee that is usually around
1 percent of the value of your shares. Money market funds generally
charge half this amount. Many funds also charge a maintenance fee
for your IRA of about $10 a ear.
Mutual funds seek to ac ieve investment growth, safety, and
stability through diversified investment, but you should carefully
check the sales prospectus to evaluate how m~!ch risk is involved. In
a mutual fund, your money 1s not insured aga~nstloss due to normal
Also, find out if your em loyer has agreed to a ayroll deduction
an for IRA'S that is not rJatted to a pension plan. !'he mone would
invested by a financial institution and you could select the
want. The range and nature of investment options might be greater
than if you went to the financial institution as an individual.
Still, you may prefer to locate an IRA on your own.
Be sure to shop around. Ask to talk to the IRA specialist at various
financial institutions. They all have one.
Make sure the institution has been ap roved for IRA'S. Banks,
savings and loan associations, and federa ly insured credit unions
are eligible to act as trustees automatically. Other institutions must
be certified by the Internal Revenue Service. Ask the institution for
written proof of certification.
Consider what you want an IRA to do for you and ex.plore in those
terms. Assess your temperament, age, and retirement income needs.
Weigh the relative safety of your investment options. Generally speaking, the closer you are to retirement, the more conservative your
investment choice may be? particularly if you will be de ending heav1 different
ily on IRA dollars. You might also consider opening 1 ~ 1 in
financial institutions to diversify your retirement investments.
Make certain to get the disclosure statement required by law. The
trustee must give you an explanation of all the income tax consequences of opening and maintaining an IRA account.
If the rate of return on the IRA is guaranteed or can be reasonably
projected, this disclosure statement must ive you a projection of the
growth of the program a t the end of eat[ of the first 5 years of the
contract and at age 60,65, and 70. Among other things, the statement
also must give startup and administrative costs.
If the investments are made in mutual funds or on the open market,
you must insteed be informed of what sales and administrative
charges will be made against your contrib~~tions
and how annual
earnings are fi ured.
Ask about &e minimum amount required by an institution to open
Make a point of understanding the kind of interest, or other ret,urn,
that is being offered. Ask how interest will be calculated, too. I t makes
a difference in the dollars coming to you.
Interest rates and fees will vary from institution to institution and
from locality to locality. Understand, also, that in man cases,
interest rates will not remain the same during the life of your I&A.
Keep in mind that you can move your IRA without in( urrin a tax
penalty, but the institution you are leaving may charge tl pena ty for
New savings plans can help
you prepare for retirement.
But there are rules to
follow and choices to make.
Here's what you need to know.
$2,000.If you run a business, it may
pay to hire your spouse part time to
d o w both of you to have IRA's.
The main limit on IRA contributions
is that you can't contribute more than
what you receive in on-the-job compensation. That's of special interest to
part-time workers. Nor can you make
only have $26,000 after contributing contributions if your only income is
$2,000to an IRA. For a married couple from interest, dividends or other nonfiling a joint return, that reduction employment sources.
means a 1982 tax saving of $580. In
As long as you don't exceed the yeareffect, it costs this couple only $1,420 ly ceiling on contributions, there is no
to make a $2,000investment. The sav- limit to the number of individual IRA'S
ings are bigger for people in higher tax you can have. Moreover, you are not
brackets, smaller for people in lower locked into an IRA. Within limits, you
can close old IRA'S and open new ones,
m Interest and other earnings on the or sometimes switch the type of investIRAinvestment, including capital gains, ment within an IRA. The tax .rules
accumulate without being immediately don't require you to put money in evtaxed.That lets the value of your IRA ery year, and the payments you make
snowball since the balance upon which don't have to be in a lump sum. Some
you can earn investment income isn't sellers of IRA investments, however,
reduced by a tax bite.
may require a minimum deposit.
Self-employed persons can set up
IRA's, too, even if they also have IRAUntil this year,IRA's had been limited like Keogh retirement plans.
to people who weren't covered by an
employer-sponsored retirement plan. Returns You Can Get
Last year's big tax-reduction bill
The key to benefiting from an IRA is
changed that. Starting in 1982,anyone to "start early and contribute consiswho gets compensation from employ- tently," says Gary Strum, a vice presiment, including fees for professional dent at E. F. Hutton & Company, the
servicesor income from part-time work, investment firm.
can set up an IRA, even if also covered
For example, a person who is now 40
by an employer's retirement plan.
years old and pays in $2,000 a year to
An individual holding a job can put an IRA that earns 8 percent a year
up to $2,000a year into an IRA.Open compounded quarterly would accumua separate account for a nonworking
spouse who doesn't receive apy pay
during the year, and you can put away
a combined total of $235O-split in
any ratio, but no more than $2,000to
either account. If you and your spouse
both work, you can each invest up to
Working hmericans who are willing
to start socking away cash for retirement are now getting a big new h e l p
ing hand from Uncle Sam.
Effective January 1, tax breaks reward individuals who put up to $2,000
a year into a special savings planknown as an individual retirement account-to build a nest egg for the future. Money put into an IRA can be
invested in any number of ways-from
simply opening a savings account at a
bank to trading in stocks and other securities. You can have a professional
manage the money in your account or
you can do it yoursel€.
As a result, a whirlwind of bidding is
under way by firms seeking to handle
the flood of investment money. Banks,
savings m d loan BSSOCiations, mutual
funds, credit unions, insurance companies and stockbrokers are all offering
IRA investment plans. Some companies are setting up payrolldeduction
plans for IRA contributions.
Financial institutions are "fighting
tooth and nail" for this money, says
William Donoghue, publisher of a newsletter on moneymarket mutual funds.
The American Bankers Association
says more than 50 billion
d o k s a year could flow
into IRA programs, although much of this money will come from cash
Here's what could happen to an individual
earmarked anyway for inretirement account in which $2,000was it?vestments and savings.
vested each year-
What makes IRA'S attractive are two big tax
benefitsThe money that you
contribute to an IRA is
deductible from your income before calculating
how much federal income
tax you owe, even if you
don't itemize any other
For example, a person
who would otherwise
have annual taxable income of $28,000 would
*t;dn ~ e p o dby
t Dollas Accumulated at
mrted Age 65 8% Interest 12% Interest
Double the amounts for a working couple
who contribute $4,000a year.
Note: Figures assume deposits made at start of
p d , with interest compounded quarterly.
Vs. Inflation's Erosion
V.lw of Today's SlO0,OM) In
Y e a
curities, mutual funds, options and
realestate partnerships. Note: Deposits to an IRA must be in cash. You can't
contribute assets, such as stocks, you
Also available for investment are special U.S. individual retirement bonds,
available from Federal Reserve banks
and the Treasury. They yield a relatively modest 9 percent a year.
Specifically prohibited for new IRA
investments are gold, art, antiques, diamonds, coins and other so-called collectibles. An alternative is to invest indirectly in such assets-shares in a
gold-mining firm, for example.
Experts suggest you stay away from
tax-exempt securities, such as municipal
bonds. The reason: The interest on such
securities are less than on other investments and yet don't escape tax in an
IRA-they are taxed when withdrawn.
More controversial is the question of
investing in stocks. Some analysts look
late $164,000 by the time he or she
Many people are likely to open ac- eskance at buying securities for longreaches 65. If the IRA earns 12 percent
a year, the balance will reach almost counts at banks or savings and loans, term price appreciation because shares
$327,000;start at age 30, and by age 65 which have garnered the bulk of IRA'S held in an IRA don't get favorable
you can have more than 1 million dol- in the past. One big drawing card: Fed- long-term capitai-gains treatment. Inlars stockpiled, even though your con- eral insurance for up to $100,000. After stead, these analysts suggest buying
tributions totaled only $70,@. One your IRA tops that amount, you can stocks that pay big dividends, or highNew York S&L advertises: "Retire a open more at other banks and SgcL's to yielding debt issues such as bonds and
government securities, to benefit from
millionaire for just $166.66 a month." stay fully insured.
IRA funds can be put into any bank the tax deferral in an IRA. Others,
But don't let the gargantuan figures
blind you. Behind the assumption that or S&L account, but most heavily pro- however, say that even though you
you can earn 12 percent a year, for moted are certificates of deposit specif- give up capital-gains benefits, stocks
instance, is an assumption that high in- ically aimed at IRA funds. They have a may still be the best bet for long-term
flation will continue. If that is so, by the maturity of 18 months or more and can growth to outpace inflation.
Many employers are allcwing payroll
time you retire, 1million dollars wori't pay any rate of interest an institution
be worth nearly as much as it is today. wants, though the rate is generally deductions to IRA'S; this offers conveIn addition, an IRA only defers tax; it linkea to that paid on government and nience and often lower costs. NCR
doesn't exempt you from it. When you other money-market securities. Some Corporation in Dayton, Ohio, for one,
start withdrawing funds, you will be banks in December were offering up gives employes a choice. They can funtaxed on all you take out--at regular to about 14 percent a year on such nel their money to NCR's credit union,
income-tax rates. Moreover, no special CD's. Many institutions offer a choice: a mutual fund that is managed by T.
favor will be given to IRA earnings A certificate with a fixed rate or one Rowe Price Associates, or a program
from long-term capital W c h as with a rate that varies with money- run by Connecticut General Life Insurthe sale of stock held longer than a market yields. Credit unions also may ance Company for investing in longterm securities.
year. Capital gains will be taxed the offer special IRA savings certificates.
The new law also allows employers
same as other income, rather than at
Mutual funds hope to pull in a large
the lower rate that normally applies.
share of IRA accounts because of the to accept IRA-style deposits to a firm's
hievertheless, financial advisers say flexibility and variety of investment own pension plan, although that apU ' s still shape up as a good buy. They that funds allow. Some investors are proach appears to be less popular.
also note that the tax bite may be eased expected to start off with money-marat retirement when you presumably ket funds, possibly switching later to Wittrdrawals
will be in a relatively low tax bracket funds investing in common stocks.
Though IRA'S are billed as a way to
because you won't be working.
Dreyfus Service Corporation, as one save for retirement, your age rather
In addition, advisers say that people example, allows its IRA clients to than job status determines when you
should start IRA'S because Social Secu- switch without charge between six mu- can withdraw money. You can take
rity and private pensions cannot be tual funds it manages. Included are cash out without penalty, gradually or
counted bn to provide all the cash bond, stock and money-market funds.
all at once, as early as age 59M, and the
needed for retirement.
Insurance firms offer several plansbalance still accumulates tax deferred.
Despite the hoopla, there's no need including annuities that guarantee a
Unless you become disabled, withto fmh into an IRA. Though opening minimum income level for life after drawals before 59% are subject to a tax
an IRA early this year will get you a you retire.
penalty of 10 percent of the amount
The greatest flexibility is offered by withdrawn, in addition to your being
fast start on earning tax-deferred income, you can wait until you He your accounts you can manage yourself hit by income tax. The same age limits
1982 tax return in 1983 to open an IRA through a stockbroker. Merrill Lynch on withdrawals apply to a spouse for
or make a contribution to one, and still lists 19 investments open to its IRA whom you've opened an IRA. There's
clients, including stocks, bonds, U.S.se- no early withdrawal penalty if you die,
get a 1982 tax deduction.
U.S.NEWS & WORLD REPORT. Jan. 1 1, 1982
in which case your IRA arisets can be
passed on to heirs.
Note: You can't get around the earlywithdrawal penalty by borrowing from
an IRA or using its assets as collateral
for a loan. Do that and you are subject
to penalty and tax as if the amount
were an early withdrawal.
Nevertheless, advisers say that people shouldn't let the withdrawal penalty scare them. That's because the tax
breaks are so large that in some cases in
future years you may come out ahead
even if you must incur the penalty.
You must start withdrawing from an
IRA after you reach 70%.At that point,
the withdrawals must be at a rate fast
enough to deplete the IRA over either
your life expectancy or the joint expec
tancy of you and your spouse. You can
make contributions to an IRA up to the
year in which you reach 70%.
But even people under 59% can
take out IRA funds temporarily without incurring a penalty or tax. Once a
year you can close an IRA and hold the
funds for up to 60 days before rolling
them over into a new account to avoid
tax or the 10 percent penalty. You can
use the funds as a short-term loan or
invest them to get current income.
If you want to switch an IRA more
than once a year, the institution holding your account must transfer it to the
hew institution, thus keeping the funds
out of your hands and preventing you
from bemg hit with tax or pedty.
Note: ~ h o u g hyou avoid tax penalties
in such a transfer, you may run into
extra charges levied by the institution
in which you have your IRA-an earlywithdrawal penalty on a savings certificate or a redemption fee on a n insurance annuity,for example.
When opening an IRA, there are often initial charges to pay, as well as nn
annual fee, sometimes based on the
value of the account. But the levies are
generally snall. Banks and SBeL's usually charge nothing to open an IRA and
$10 or less a year to maintain it. Many
mutual funds charge $5 to $10 to open
an IRA and less than $10 a year to keep
it up. Self-directed accounts at stockbrokers may cost up to about $30 to
open, with a maintenance fee of about
$25 or higher depending on the account's size and ty+. You also @y
commissims on the purchase of stocks
and some mutual-fund shares and insurance annuities.
The best advice: Shop around, don't
be misled by fancy sales pitches and be
wary of promises of high future yields
that may not be met.
By LEONARD WLENE?i
U S N E W S & WORLD REPORT, Jan 11. 1982
THE WALL STREET JOURNAL, Monday, December 14, 1981
Your MQney Matters
to put your
1Lmk at Risks, Management and All the Fees I
By JILL B m m
Bylf Rcponer uf I h u Was. SR~PCT JWWL
For mlltions of people, the question isn't
whether to open an individual retirement account (IRA) after Jan. 1, but where.
Financial institutions. brokerage .firms.
credit unions. insurance companies and mutual fu$s are all competing for your busipess, as you have undoubtedly noticed from
the barrage of advertising in recent weeks.
Whatever investment you choose, any
amount that you contribute to your IRA will
be tax-deductible, up to $2.000 a year, or a
total of $2350 for yourself and a nonworking
spouse. The earning can be left to accumulate -free until you reach at least age
~ n fees
y for setting up or maintaining an
Brokerage FLrms. The big brokerage
houses offer the most variety of investments, although you will pay more in fees
for your IRA than you will at financial institutions. And brokerage retirement accounts
from various institutions:
aren't covered by federa! deposit Wrance.
Banks. Thrift ~ t i o n sand Credlt
Basically, there are two ways to @.'A
Unions. The options include certificates of
self-directed IRA lets you buy and sell
deposit with a choice of maturities, as well
stocks and bonds as you like, or control inas regular passbook savings accounts. Their
vestments in such things as real estate, oil
fees are the lowest,'and IRAs are federally
and gas or equipment leasing. At Paine
insured, up to $100,000.
Webber Jackson & Curtis Inc., investors can
New are 18-month certificates, permitted
buy mortgage securities insured by the Govonly for IRA5 and Keoghs, which are retireernment National Mortgage Association
ment plans for the self-employed. These
(Ginnie Mae). The fees, which are typical of
to lnwst depends on the "wild-card CDs can carry any interest rate
those the firm charges for all of its self-dirisk you will accept in return for a possibly that a financial institution chooses to pay.
rected accounts. are 525 to open an IRA.
higher tax-free yield, whether you want to Most banks and savings and loans are curbrokerage commissions of $30 per $1.000 incontrol your IRA yourself or have it profes- rently advertising rates of between 14% and
vested, plus a S25 annual maintenance, or
sionally managed. and how much you want 15% on either fixed- or variablerate 18- custodial, fee.
to pay in assorted fees (see accompanying month certificates. Minimum deposits can
Memll Lynch will charge $30 to open any
be as low as $1. Credit unions can vary the
kind of self-directed IRA, plus brokerage
No matter where you put your IRA dol: terin. as well as the rate, on any certificate
commissions. The annual mamtenance fee
tars. if you dip into the account before age they decide to offer.
wll be the greater of $50, or two-tenths of
58%. yon will pay a penalty tax of lo?" on
.If you have an existing IRA or'~eogh, 1% of the assets in the account as of Dec. 31
the amount withdrawn. And. the money you and you are stuck with an old, low-interest each year. Bache Halsey Stuart Shields Inc.
take out will be taxed as ordinary income.
savings certificate that hasn't matured, you
will have fees of $25 and a minimum annual
For instance, if you accumulate $10.000 in can avoid an early-withdrawal penalty and
fee of $35.
an IRA and decide to take out $2,000 before still start earning more on contributions tw
The lower-cat route at a brokerage firm
you reach the magic age, you will pay a ward your rehrement savings from now on.
is to invest in any of the professionally manpenalty tax of t200. The other 58,000 will reA financial institution can assess an earaged mutual-fund packages the firm sells.
main sheltered. If, however, the $10,000 w s ly-withdrawal penalty, which requires you to ?Lplcally, the packages include a moneyinvested In a bank certificate of deposit or forfeit at least the last six months' intergt.
market fund and several types of stock
an insurance annuity, you. could also pay only Lf you invade the certificate's principal.
funds and bond funds. Also available are
other penalties for getting at the money But you can withdraw the accumulated infunds that combine stocks and options.
terest without penalty any time. (The same
There is usually a fee of about 8 to switch
out of one fund and into another.
Still, the tax penalties for early with- $ true of any kind of savings certificate.)
drawals from an IRA aren't prohibitive. AfMerrili Lynch will charge $15 set up a
diter a few years, they can effectively be paid
mutual-fund account, plus an annual c u t e
out of tax-free interest.
dial fee of $20. Dean Witter Reynolds Inc.
also be paid to the new plan. It is
(Note: While annual contributions to the tificate
will charge $20 and 520. respectively.
new universal IRA are a write-off on your banks hate people who do it, few of them
"No-bad" blutnal Fund
federal tax return starting in 1982, many
Firms like the Fidelity Group. the DreyruS
charge any fee for such automatic Interest
states, including New Jersey and California. transfers.
Service Corporation. T. Rowe Price and the
haven't amended their laws to make the
Vanguard Group offer IRA investors several
contributions deductible from state income
professionally managed funds without sales
taxes. Most state legislatures, however, are
expected to act in time for claiming the full
deductions for 1982.)'
IRA are m deductible fmm federal taxes.
whether you choose to pay them out of Your
annual contributions or separately. Here is a
sample of the types of investments available
At most companies there won't be a
charge for setting up the account or for
switching between funds. Annual manage
ment fees typically will run $10 or less.
All of the big companies are also aggressively marketing theirfunds for payroll-deduction mks. If your employer offers such
a plan, participating in it could c a t you less
than buying the funds direbuy.
Insurance Companies. The products are
called Individual Retirement Annuities.
Their biggest selling point is that they are
guaranteed to provide a certain amount of
income each year after yw retire. The payout, per $1.000 you invest, is based on average life expectancies. as well as the value of
the investments purchased with premiums.
There are two main types of i'nsurance
IRAs. Prudential, for instance, will offer a
"front-loaded" annuity that will carry a
sales charge of 8.75% whch comes off the
top of each 51.000 you put in over the years.
Tie initial interest rate. which will be ad-.
justed hnnually. will be 13.75%. The annual
maintenance charge will be $8 on the first
payment, $1 on any subsequent payments.
There won't be any penalties to withdraw
part of your funds.
Prudential will also have a "backloaded" annufty that will pay 13% to start.
There aren't any sales charges on this type
of contract. but there is a penalty of 770 if
you withdraw any money in the first year.
That penalty scales down gradually until it
disappears entirely in the eleventh year.
The annual maintenance fee is $25, starting
in the second year.
Several Insrrrance companies will a& offer variablerate annuities that invest in mutual funds. Northwestern Mutual Life's plan
will give buyers the choice of a money-market fund, stock fund or NML I, a fund that
will move in and out of various investments
"as market conditions warrant," a company
spokesman says. This is another backloaded plan. which will charge a penalty of
870 of principal for withdrawals made in the
first fiye years. The annual matntenance fee
Reproduced by the Library of Congress, Congressional Research Service
with permission of copyright ciairnant
OK, you have decided the new individual retirement accounts (IRA) are a good idea. They save on taxes. They can
offer a firm savings program. You can now put aside up to
$2.000 a year, even if you are already covered by your company's retirement program.
But where should you invest your IRA money?
There are banks, savings-and-loan assodations,
brokerage houses, mutual funds, insurance companies, and
credit unions - all putting on an advertising blitz to pull in as
large a share of these accounts a s they can. Much of the
money going into IRAs now is probably "old" money simply
being shifted from one account to another. Some is "new"
savings that will help fill financial institution coffers.
The accompanying table shows the six main financial Institutions that are competing for the 40 to 60 million potential
IRA customers. The listed products, interest rates, and restrictions for each category are, of necessity, very general.
So, wherever you shop for an IRA, here are some possibly
What is the interest rate? How is it calculated? How
often is it compounded? Is the rate guaranteed for a specific
length of time?
What is the minlmum inltial investment? What is the
minimum on subsequent investments?
Are there charges to open the account? If so, is this a
flat fee or is it a percentage of the deposit?
0 Can I contribute to the IRA through payroll deduction?
0 Are there any annual charges?
0 Are there any charges to transfer money from one of
your accounts to another account, a s from a money fund account to a bond fund?
0 What are withdrawal penalties if vou want to take your
money somewhere e!se?
Business correspondent of
The Christian Science Monitor
By Thomas Wattersoo.
what to look for
in making an IRA kitty
Here are a few additional points to consider:
Your first investment decision need not be your final
one. Many institutions have little or no charge for transfer
ring or withdrawing your money. The law permits you to
.sNft your IRA account once a year to another investment
vehicle. You must make the shift within 60 days after withdrawing from the first IRA.
Federally insured depository institutions, such a s banks,
savlngs-and-loans, and credit unions, probably offer the
safest IRA vehicles. particularly for people who don't want to
to be. tending their account. The 18- to 3emonth certificates
offered b v b a n k ~and .WLs are ~ a W j ? .i~c~rirdihg
ads, from 12 to 15percent interest a t maturity.
,Putmoney Into your IRA account a s q&kly a s you can.
If you can afford it, put the entire'$2,000 innow and and start
collecting interest immediately. The effect of compounding
- especially if it is done daily - means the sooner the money
goes into the IRA. the more it will earn.
0 Don't get hung up on the $2,000 figure. Many people a r e
saying. "I can't afford to put $2,000 a year in an IRA." They
should put in what they ran afford. Even if it is only SO0 (less
than $10 a week), that's $500 that is not taxed by Uncle Sam
this year and will probably be taxed at a lower rate a t
11 to 15
11 to 15
passbodcs, l a to
or fixed rates
Money market fund
Growth stock fund
The IRA accounts: who has what?
By Francine Kiefer
Business correspondent of
The Christian Science Monitor
Think of it, a t age 65 you could retire with a comfy individual retirement account - worth a million dollars. It's right
there in print. . .just like the ads say. ,
The ads are hard to miss. They are put out by banks
arross the country. and many run full-page in daily newspapers. Their simple message is this: open an Individual Heti~ementAccount. save $2,000 a year, retire on a million.
Is this for real? Yes and no. Mathematically. these
millionare ads are accurate. If you pump the maximum allowed !$2.000 if you're single, $ 4 . 0 0 if you're married) into
your IRA at the beginning of every year, it will reach the
million mark in almost 35 years. The banks arrive at this
grand total by figuring a 112 percent rate of return, compounded daily - a reasonable rate in today's economy.
But what if that 12 percent rate doesn't stick around for
the next 35 years? And will $1 million still be worth $1 million
in today's purchasing power then? And how easily can people
put $2,00Oor $4,000 aside by the beginning of every year?
None of the ads guarantee the 12 percent over the life of
the IRA. At Dry Dock Savings Bank in New York, which runs
full-page "millionare" ads in the New York Times. Joseph
Ludovico says the bank guarantees 12 percent interest for 18
months. Mr. Ludovico, pension services manager for the
bank, says the 12 percent rate works out to nearly 13 percent
because of the daily compounding.
"I feel uncomfortable about the ads," says Barnet Berin,
director of program standards at William M. Mercer Inc., a
major pension employer benefit firm. Berin says 12 percent
is "very Mgh" and can't be counted on to continue. "Over the
long run, interest rates have been well below 12 percent," he
adds. It would be much better, he suggests, "if the ads
showed what would happen at low, medium, and high rates."
Interest rates make a big difference in the end sum. Let's
say the IRA was figured on 8 percent instead of 12 percent.
same rules still applying. What might have been a nest egg of ,
$2,131.620 after 40 years would come down to $612.380, says
Michael Ryan, principal and actuary a t Towers, Perrin, Forster & Crosby, another pension consulting firm.
Kenneth McLennan, an economist with the Committee for
Economic Development, says the "retire a millionare" campaign is "a little optimistic." He adds: "As the prime lending
rate begins to fall substantially in the next 5 years, banks
simply will not make it [the $1 million goall "
Of course, it's debatahle whtlher the rates will fall a s Mr.
MacLennan predicts. But, he says, if the prime rate doesn't
fall and stays where it is (around 15 percent), the 12 percent
rate of return will hang on . . . and so will high inflation. And
that means $1 million will not be worth $I million in 1982
purchasing power a couple decades down the pike.
If we assumed a 10 percent rate of inflation over the next
25 years. $1 million would be worth $58,820 in today's dollars.
However, "this country's democracy couldn't last through so
many years of high inflation," Mercer's Mr Rrrin suggests.
Mark Clark. a spokesman for the United States League of
Savings Associations. says that what the "millionare" ads do
is force people to recognize that "self-managed retirement
plans can result in a significant nest egg for everyone. It
shows people how fast tax-free, compounded interest can accumulate.'' If you're in the 50 percent tax bracket, Mr. Clark
says, tax-free IRA accumuhtion over 35 years will be nearly
10 times more than if it were taxed.
There's still the question of how many people will be able
to put aside that maximum amount for their IRA every year.
Manv* ~. e o. o l will
e be ooenine
an IRA in addition to their own
employee pension plan. Barnet Berin says, "people under the
social-security wage base 1$32.4001would have problems saving it." ~ i c h a e Ryan
thinks it will be done "by people . . .
whose family expenses (mortgage, car, etc.] have subsided."
Dry Dock's Mr. Ludovico disagrees. He emphatically
states that "people wanting to carve a niche for themselves
will be able to do it." The incentive is in the extraordinary
accumulation of interest. he exclaims.
a cold, hard look at the million-dollar IRA