The ads came fast and furious. "Open Your IRA Now!" "Only Two Days Left!" Right up to April 15, 1983, the last day most people could open an individual retirement account for the 1982 tax year, banks and investment companies were begging for your money.
You may, of course, have ignored or resisted all of these entreaties and enticements. Doing so allowed you to give the government as much as $1,000 that you didn't need to.
You may also have plunked your money down at the local bank a day or two before the deadline. That was better than nothing. But the same approach year after year could mean losing many thousands of dollars by retirement. "All IRAs are not created equal," notes Robert Ladner, head of a consumer-research firm that has studied the phenomenon, "and banks are seldom among the rate leaders."
This year you get another chance to open an IRA or add to your old one. And since the outlook is for another advertising blizzard, a little advance planning may be in order.
For one thing, remember you can put your money wherever you want. Commercial banks, savings and loans, mutual funds, insurance companies, and brokerage houses all offer IRAs, and the money you deposit this year doesn't have to go to the same institution that got last year's account. For that matter, you can move last year's money (unless it is tied up in a time deposit) to a new place this year.
If you stick with a bank -- as you may want to if retirement is near or if you have an aversion to risk -- don't necessarily go to the bank down the street "Rates vary quite substantially in different parts of the country," says Robert Krughoff, author of a handy volume called The IRA Book. "You can put your money 3,000 miles away if you want." A difference of three percentage points maintained over 30 years, he says, may be worth as much as $100,000. And since most certificates of deposit were deregulated on October 1, 1983, banks can offer whatever the market will bear on these time deposits. The resulting competition should lead to bigger spreads between highly competitive banks and those in more subdued markets.
Two other things to check in a bank IRA, Krughoff adds, are how the interest rate is compounded and whether you can add money later at the same rate. Krughoff opened an IRA two years ago at a bank that advertised an 18% rate. The 18% was simple interest, which makes it equal to only 13.7% interest compounded annually over five years. The good news was that he could add to the account later and get that same yield. So when bank interest rates dropped well below even 13%, he had a sort of option on a higher interest rate that he could take advantage of.
The moral, Krughoff advises, is to read the fine print -- or his book, which is available for $5.95 from the Center for the Study of Services, 1518 K Street NW, Suite 406, Washington DC 20005. The book gives details on bank (and other) IRA plans all over the country, and, although its interest-rate numbers won't be up to date, it should prove useful as a guide to where the best deals were the last time around.
If you are looking for higher rates of return than you can get from a bank, you can put your IRA money into anything from a mutual fund to an oil-and-gas partnership. The trick here is to look for high-yield investments that take advantage of the IRA's tax-deferred character. The Fidelity Group, for example, offers a mutual fund -- Fidelity Freedom Fund -- that is limited to tax-qualified accounts such as IRAs, the fund's manager can trade heavily without regard to short-term tax consequences, and thus may be able to outperform ordinary funds with similar investments. New England Mutual Life Insurance Co. and Merrill Lynch Fierce Fenner & Smith, among others, offer limited partnerships in real estate that are also specially designed for retirement accounts. Unlike most real-estate syndications, these are structured to maximize current income and capital-gains potential without concern for depreciation and similar tax advantages.
Your broker or financial planner, of course, may be able to assemble a custom deal for your IRA. "Last year, for some of our clients, we did a Chuck E. Cheese's Pizza Time Theatre syndication for a franchise in Minnesota," says Beverly Tanner, a financial planner in Larkspur Landing, Calif., "and we've also done some oil-and-gas income limited partnerships." Some such investments, says Tanner, can pay as much as 14% yet still have good growth potential.
One factor to consider in making your decision is liquidity. The word has a special meaning where IRAs are concerned, since you must ordinarily leave the money in the IRA until age 59 1/2. But the IRS allows you to move your money around from one account or institution to another. That lets you switch from a mutual fund to a money-market fund, for example, if interest rates rise (although you may have to pay a transfer fee).
Such deals as real-estate partnerships, by contrast, can sometimes be sold, but the buyer then loses whatever chance at appreciation the deal offers. "You shouldn't buy a partnership unless you expect to hold it for the full period," cautions Don Underwood, vice-president and manager of retirement plans and services for Merrill Lynch. At Merrill Lynch, that usually means from 7 to 12 years.
At the moment, you are limited to a $2,000 annual contribution, plus any lump-sum distributions you may have received from company pension plans. This money, it should be noted, is not locked up forever. If you withdraw any of it early, you have to pay income tax on it, along with a 10% penalty. But after about four years, says Beverly Tanner, "you still come out ahead because the money has been compounding tax free."