IRA Shopping? Now Is Bargain-Basement Time

It’s the peak season for selling individual retirement accounts, and marketers are offering deals more aggressively than ever.

For the first time in more than five years, banks, brokerage houses and mutual fund companies en masse are offering to cut or waive fees, sales charges and other expenses on IRAs.

While IRAs have been around for years, this is the first time since contribution rules were tightened in 1986 that financial services companies have launched a concerted effort to woo IRA dollars. There appears to be a growing recognition that managing IRAs is still a profitable business, even though fewer individuals can deduct contributions to them.

The result is a buyer’s market for investors who want to contribute to--or roll over--IRA accounts. Brokers and mutual funds, which typically charge between $10 and $35 as annual IRA fees, are now giving the accounts away free.

Prudential Securities, for example, recently said it will waive its maintenance fee for anyone who “regularly funds” an IRA. Great Western Bank just ditched its annual fees and up-front sales charges for some people who transfer money into its Sierra Trust funds. If your IRA money is in a certificate of deposit, however, the bank will charge $15 a year and an extra $15 “termination fee” if you close the account or transfer it elsewhere. Calvert Group says it will give part of your IRA fee to charity.

Dreyfus Corp. waives its $10 account fee for IRA investors who put their money in the company’s Growth & Income Fund or its International Equities Fund. Vanguard Group and T. Rowe Price waive the fees on any IRA account worth $5,000 or more. Twentieth Century doesn’t charge fees if your combined IRA assets--you might have multiple IRA accounts with one mutual fund company--add up to $10,000 or more.

Fidelity Investments uses a novel, carrot-and-stick approach. Late last year, the fund company said it would waive annual fees and up-front sales charges for IRA account holders who invest more than $5,000 in most Fidelity mutual funds. (There are a few exceptions.) The company’s discount brokerage arm, which usually charges $20 annually for IRA accounts, also waives the fees for customers with accounts worth $5,000 or more.

Then last month, the Boston-based company released a retirement survey designed to send a chill down your spine. Roughly 34% of the people closest to retirement--those 40 and older--have saved less than $30,000 for retirement, the study found. Moreover, an overwhelming number of people who last year promised to spend less in order to set aside more money for their golden years, proved unable or unwilling to do it, according to the survey, conducted by Yankelovich Partners.

“Unless personal savings increase, Americans may have to accept lower standards of living in retirement,” said Cynthia Batista, vice president and manager of Fidelity’s Los Angeles investor center.

Why is all this special attention being paid to retirement savings accounts?

Jan. 1 through April 15 is the prime hunting season for IRA investors, because a provision in the tax code allows roughly 50 million Americans to deduct up to $2,000 of IRA contributions on their 1993 tax returns--even if the money wasn’t invested until early 1994.

That’s got banks, brokerages and mutual fund companies trolling for customers. And many are anxious to persuade you to contribute to IRAs now, even if you can’t qualify for the tax deduction.

“Most Americans stopped contributing to their IRAs following the Tax Reform Act of 1986,” said Gerald H. Tankersley, director of asset management services at Prudential Securities in New York. “We believe that’s a big mistake. IRAs are still one of the best tax-deferred retirement vehicles available.”

Until 1987, everyone could contribute up to $2,000 to an IRA account and deduct the contribution from income on their tax returns. The 1986 tax act severely limited the number of people who can take the deduction. Now you can deduct IRA contributions only if neither you nor your spouse is covered by another pension plan or if your income falls below certain thresholds.

If you’re married, you get a full $2,000 deduction if you and your spouse together earn less than $40,000. If you’re single, you can take the full deduction when you earn less than $25,000. IRAs are partially deductible for married couples earning up to $50,000 and for singles who earn as much as $35,000.

If you’re not covered by a pension plan, you can take the deduction no matter how much money you earn. Industry experts maintain that about half the nation’s taxpayers qualify for the full deduction.

Even if you can’t deduct the contribution, however, income placed in IRA accounts generally accrues tax-free until you pull it out at retirement. Some financial advisers say that in today’s environment of rising tax rates, the promise of tax-deferral alone should be a compelling argument for having an IRA account.

Bankers, brokers and mutual fund companies want your IRA dollars because they’re a great source of stable earnings for them.

Fund companies collect annual management fees, which are separate and distinct from the “custodial” fees they are now waiving. Bankers live on a “spread” between what they pay you in interest and what they earn from reinvesting your money. Brokers, such as Prudential, earn commissions every time you sell one stock in your IRA account and buy another.

And IRA funds are exceptionally stable, because once you make a contribution, you can’t easily pull the money out and spend it. If you withdraw IRA money and don’t quickly reinvest it in another IRA, you’ll pay ordinary income tax on the “distribution” and a 10% federal excise tax. Most states impose additional tax penalties.

“If people put their IRAs here and contribute every year, we are going to have more client assets, without a doubt,” said Tankersley. “That presents us with more opportunities to earn money.”

Kathy M. Kristof welcomes readers’ comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA, 90053.

Are You Ripe for an IRA?

Should you contribute to an IRA? Take this short quiz to find out:

1. I can deduct IRA contributions.

a) yes b) no

2. I invest in variable annuities to get the tax-deferred income.

a) yes b) no

3. I have $2,000 and no place to spend it.

a) yes b) no

4. I have plenty of short-term savings but nothing set aside for retirement.

a) yes b) no

5. I can’t deduct the contributions, but I could use the tax-deferred earnings. And there is very little chance I’ll need this money before I retire.

a) yes b) no

6. I wouldn’t mind paying out more than half my IRA savings in taxes and penalties--in the event that I have to withdraw the money before retirement--because I’d like to do my part to reduce the federal deficit.

a) yes b) no

If you answered yes to any of the above questions, seriously consider opening an IRA. If all your answers were no, pass.