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Getting the Most Out of Your IRA

It is easy to set up an Individual Retirement Account (IRA). Choose the bank, mutual fund company, or other financial institution where you want the IRA account, fill out an application, designate a beneficiary, and make an opening deposit. Although you can open an IRA at any time and contribute for the previous year up until April 15, the earlier in the year that you deposit money in an IRA, the longer it will have to grow and earn through compounding.

In 2001, if you have earned $2,000, you can contribute any amount up to $2,000 yearly in an IRA. If an earner and a non-earning spouse are each setting up accounts, contributions can be as high as a total of $4,000 ($2,000 a piece).

However, according to the new tax bill approved by Congress, starting in 2002, the current $2,000 limit for individuals rises to $3,000 a year and continues going up until it reaches $5,000 annually in 2008. After that, it will rise to cover inflation. These new rules apply to both traditional and Roth IRAs. In addition, if you are over age 50, you'll be able to contribute an additional $500 a year into either type of IRA, and $1,000 a year over the limit starting in 2006, putting the total then at $5,000.

Many people wonder where their IRA money should be invested. Think of shopping for an IRA as similar to shopping you do when you're looking for a place for your short-term savings. As you shop for an IRA, compare interest rates, compounding periods, early withdrawal penalties, fees, risk, maturity periods, the amount of personal management required, and other features you consider important. As with any investment decision, you want to get as much information as you can regarding the alternatives.

Virtually any security is appropriate for an IRA except one that is already tax-empt. The whole idea of an IRA is to defer taxes, and there is no point in tax sheltering something that is already exempt.

The major sources for IRAs accounts are banks, savings and loans, credit unions, mutual fund companies, and full service and discount brokerage houses.

Here are some guidelines for selecting an IRA custodian:

1. Banks, savings and loans, and credit unions offer a variety of fixed- and variable-rate CDs for IRAs. Rates can vary several percentage points among institutions, so shopping around will pay off. Be sure that bank CDs are insured by the federal insurance association, FDIC, or by NCUA for credit unions.
2. Mutual fund companies provide a diversified portfolio of stocks and bonds for IRA investors. Fund families offer several choices of funds, such as growth, growth and income, bond funds, or money markets. Returns depend on the particular fund and on the economy. While there can be a large gain, there is also a chance of loss. In addition, the return depends on whether a commission (load) is paid or if there is no commission (a no-load fund) and the amount of annual management fees.
3. Full-service and discount brokerage houses offer a variety of IRA investments. Brokers can help an investor select a portfolio of stocks, bonds, mutual funds, and other investments. Returns depend on the securities selected and on the condition of the market at the time. Costs vary significantly, including initial fees and annual maintenance fees.
4. IRAs that let you choose among many different types of investments are known as self-directed IRAs. You make all the choices yourself. Discount brokers are appropriate for this type of account, particularly if you do your own research and don't require "hand-holding."
   

At banking institutions and no-load mutual fund groups, set-up fees are usually minimal or zero. There may be small annual maintenance fees. Full-service brokerage firms usually charge a set-up fee plus an annual maintenance fee payable separately or deducted from your account. Discount brokerages often have a minimum account balances, (e.g., $10,000), after which annual fees are waived.