By Ellen Hoffman If you live in one of the 42.5 million households that have already invested in an IRA, you probably ignore these shills. After all, you can just dump another $2,000 into whatever account you already have. But that may not be the best strategy. Before you do the same old thing, think about this: How long has it been since you really looked at your IRA? If it has been a year or longer, there are some steps you should take now, before tax-time deadlines pressure you into a less than well-thought-out investment.
The first thing you should do is review your current accounts. Where is your IRA money? In a speculative high-tech stock? A well-managed mutual fund? A safe money market? Rene Kim, vice-president for retirement products and marketing at Charles Schwab, says you should think about your IRA in the context of your overall retirement-savings strategy. For example, if your 401(k) is aggressively invested, you might want to invest your IRA money more conservatively. While money markets and CDs may have seemed like sluggish vehicles during the bull market, they may be more appealing now. At www.bankrate.com you can click on IRA Center for nifty tools that will help you search for the best rates on IRA CDs and money-market accounts.
FEE RANGE. The next thing you should consider is consolidation. The Investment Company Institute, a Washington (D.C.)-based trade group that represents mutual funds, reports that 34% of households have two accounts, 13% have three accounts, and 9% have four or more IRAs. What's wrong with this? If you're part of a two-household account and you and your partner each have one, nothing. But consider the example of a lawyer I know who has four different IRA accounts and is paying $240 a year in maintenance fees. If she consolidated them in one account, she could pay much less -- maybe even nothing -- in administrative costs, as well as reap the long-range benefit of greater compounded earnings.
IRA management fees can vary widely. Many brokerage houses lower or knock off the fee entirely if your account is substantial, but bear in mind that each company or institution has its own fee scale. Fidelity, for example, waives a fee for the first year after you open an IRA. After that, the annual charge is $24, unless all of your holdings are in Fidelity funds, in which case you pay nothing. If you're self-employed and have your Simplified Employee Pension IRA with Merrill Lynch, you'll pay $100 year. There'll be no
service charge if you put your IRA money into bank CDs. To get an idea of how much IRA fees can differ, look up the Motley Fool's chart to compare discount brokers.
The last thing to look at is your beneficiaries. Kim tells a sobering story of a 40-year-old man who had been married for six years and hadn't gotten around to changing his beneficiaries from his parents to his wife. "Now, his [widow] is in the position of needing the money -- about $250,000 -- but it's going to his parents instead," she recounts. To avoid such a problem, check with your IRA account manager to see who you've listed as your beneficiary. If you want to make a change, ask the manager to send you the forms as soon as possible.
BASIC INFO. If you don't have an IRA, you can still open one for last year until the date you file your taxes. Kim says she has met people with good incomes who consider IRAs unnecessary because they have 401(k)s or some other company-sponsored retirement plan, such as a pension. These people are cheating themselves out of substantial savings for their future, and tax breaks, either now or down the road, depending on what type of IRA they choose. An annual contribution of $2,000 (the maximum) over 30 years with an 8% return could produce an extra $160,000 to spend in your retirement. If it's invested in a Roth IRA, that money will be tax-free upon withdrawal at retirement. If you choose a traditional IRA, you could get a tax break of $560 per year if you're in the 28% bracket, or $620 if your bracket is 31%.
To open an IRA for the first time, you need to know the eligibility rules so you can make the appropriate choice among a traditional IRA, a Roth, and an account for a nonworking spouse. For good basic information, visit www.quicken.com or read IRS Publication 590, Individual Retirement Arrangements at www.irs.gov. To determine how much money you're eligible to contribute to different types of IRAs, use the eligibility worksheet calculator at www.troweprice.com.
An IRA can be a terrific resource for retirement, and everyone who is eligible should contribute to an IRA every year. But don't give this account short shrift just because contributions are limited to $2,000 a year. Like any other self-directed investment, the ultimate return depends on your ability to manage your money, not just invest it. Hoffman writes Your Retirement twice a month, only for BW Online. An excerpt from her book, The Retirement Catch-Up Guide, appeared in the July 17, 2000, issue of BusinessWeek