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IRA FUNDING ALTERNATIVES
A wide range of investment vehicles may be used to accumulate IRA contributions. Among the more popular are the bank and savings and loan association certificates of deposit, mutual fund shares, self-directed brokerage accounts and insurance company flexible, premium retirement annuities.
The Internal Revenue Service Publication 590, “Individual Retirement Arrangements,” cautions IRA shoppers to compare IRAs from different sources.
Based on fees, rate of return, guaranteed retirement income options and other considerations, the flexible premium retirement annuity issued by an insurance company may be the best option. However, the market always changes and what many generally believe to be the best solution will not apply in all cases. Both rates and terms fluctuate. Here are the major factors to consider:
FEE STRUCTURE
· Certificates of Deposit
Fees vary between institutions and can range from zero to $12 per year. Penalties on early withdrawals vary from the loss of all interest on very short term maturities, to the loss of six to twelve months of interest on longer term maturities.
· Mutual Fund Shares
Fees deducted directly from mutual fund assets include items such as auditing expenses, annual report preparation costs, custodian fees, transfer agent fees and the investment advisory management fee. Occasionally, a fee is charged on redemptions. A commission is paid on every sale and purchase of securities by the mutual fund itself, which in turn affects the financial return to the shareholder.
· Self Directed Brokerage Accounts
An annual maintenance fee ranging from $18 to $30 is charged. Regular brokerage commissions, fees and any applicable taxes are charged on purchases and sales within the account. An account termination fee of up to $50 may be charged.
· Flexible Premium Retirement Annuities
These may be purchased with no enrollment or policy fee, no administrative charge and no sales charge. An early withdrawal or surrender charge will apply in the early years, but only to the excess withdrawn above a specified amount. State law may allow a premium tax upon annuitization.
RATE OF RETURN
· Certificates of Deposit
Interest rates set by the institution, are fixed or variable and vary according to the amount of deposit and the length of the deposit period. Some certificates may pay high rates for short periods followed by rates that are more modest for the remaining deposit period.
· Mutual Fund Shares
There is no fixed rate upon which to predict the future rate of return. Past performance is the only measurement available to assess the likelihood of future performance, and cannot be used as a predictor.
· Self Directed Brokerage Accounts
Depending upon the types of investments in each account, some portion may be at fixed rates. Generally, there is a mix also containing securities subject to the market fluctuations.
· Flexible Premium Retirement Annuities
Interest rates are fixed rates set by the insurance company and usually change slowly based on changes in the general interest rate climate. Minimum interest rate guarantees are often contained in the contracts.
Variable annuities are invested in separate accounts by the insurance company. Among the choices are common stock funds and balanced equity funds. In fact, some variable annuities even offer a family of well-known mutual funds as investment options.
GUARANTEES
· Certificates of Deposit
The full vested amount in each individual’s IRA account is insured up to $100,000 by the appropriate government-insuring agency. There is no guaranteed floor for future rates, nor is the interest guaranteed.
· Mutual Fund Shares
Although the operation of a mutual fund has checks and balances, there are no guarantees as to investment performance. Principal can be lost.
· Self-Directed Brokerage Accounts
In the event a brokerage firm goes out of business, an individual account is protected by the Securities Investor Protection Act (SIPC) for claims up to $500,000 (but limited to $100,000 of cash). However, investment performance is not guaranteed for securities in the account.
· Flexible Premium Retirement Annuities
The guarantees inherent in insurance products extend to fixed annuities. Annuity values are guaranteed by the policy reserves maintained by insurance companies. These financial safeguards enable the companies to guarantee minimum interest rates as well as annuity principal. A lifetime income can also be guaranteed at distribution time.
Variable annuities are separate accounts managed by the insurance company, and the funds are not part of the general account of the insurer. Because they are invested by the fund trustees in publicly traded securities of an investment nature, most people consider that a stronger assurance of strength, subject to the fluctuations of the marketplace.
RETIREMENT INCOME OPTIONS
· Certificates of Deposit
Retirement distribution can be made subject to the minimum distribution requirement and based on life expectancy. Maturities may have to be converted to short term or daily access, which reduces the effective yield.
· Mutual Fund Shares
Retirement distribution can be taken subject to the minimum withdrawal requirement. Securities in the account continue to be subject to market fluctuations during retirement.
· Flexible Premium Retirement Annuities
Wide arrays of options are available, all of which satisfy the minimum distribution requirement. With the life expectancy retirement option, payments may be made over the annuitant’s lifetime while the account continues to earn interest at current rates, and the annuitant retains control over the principal.
Variable annuities have the same retirement options of the fixed plans, but also offer a life income that will vary based on the value of a pool of investments. This “variable” income should rise over the long term if the performance of the investment account exceeds the conservative rate at which the income amount was based.
MINIMUM INVESTMENT
Minimum investment requirements apply to most of these plan alternatives:
· Certificates of deposit usually require $500 - $1,000.
· Mutual funds may require $100 minimum, $50 thereafter.
· Self directed brokerage account might require $10,000 - $25,000.
(Sometimes based on the type of investments therein)
· Annuities generally have low minimums, even $10 - 25.
A lower rate of return will apply to any funds parked while building funds to meet a high minimum investment requirement.
Variable annuities are subject to market risk, investment risk, and possible loss of principal. Variable annuities may have higher internal fees associated with the product. Please read the prospectus carefully before investing in variable annuities.
Mutual fund shares are not deposits or obligations of, or guaranteed by any depository institution. The value of the shares will fluctuate so that when redeemed, shares or units may be worth more or less than the original cost. Past performance does not guarantee future results. Please read and understand the prospectus for a mutual fund before investing.
Source: Financial Planning Consultants, Inc.
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