Investment Class Essay - 1,680 words

Investment Class For millions of investors, a frantic rush to contribute to Individual Retirement Accounts before filing their tax returns has become a rite of spring. But procrastinator or not, you have new choices for your IRA this year, including more bank certificates of deposit at attractive market interest rates, now that nearly all government ceilings have been removed. And if this is your second or third year of funneling money into just one type of IRA, it's time you diversified. Investments eligible for IRAs include CDs, stocks, bonds, mutual funds, annuities, limited partnerships and Treasury securities, to name the principal ones. Only life insurance, precious metals, collectibles and investments bought on margin are off limits. Your choice among purveyors of IRAs likewise is varied: commercial banks, savings and loans, credit unions, mutual fund companies and insurance and brokerage firms. (Miller 36). You'll need a clear investment strategy, especially if your IRA is $10,000 or more.


The issue is whether to plump for safe, steady income by investing in Treasury securities, top-rated corporate bonds or CDs, or to take some growth-oriented risks by going into stocks, equity mutual funds or limited partnerships. You should play it safe if your IRA is crucial to your retirement plans. If not, feel free to be aggressive, provided you recognize that yo can't deduct losses on your IRA investments from other income and can't gain any tax advantage in an IRA from reaping long-term capital gains rather than dividend or interest income. Says Tom Wirtshafter, vice president of Nathan Lewis & Grant, a financial services firm in New York City: "Anyone aged 20 to 50 should lean toward putting money into stocks for growth, and someone 50 or older should be in bonds or other fixed-income investments for security." (Chisel 90). The flexibility to choose among investments is not the sole virtue of an IRA. You can deduct annual contributions to these do-it-yourself pensions from taxable income - up to $2,000 for a working person, $4,000 for a working couple and $2,250 for a working person with a non-working spouse.


At age 59-1/2, you can tap your IRA without paying a 10% penalty, though you will owe regular income taxes on the amounts removed. (Miller 38). You can open as many IRA as you please, so long as you don't exceed your annual contribution limit. What's more, you can switch trustees of your IRAs as often as you like without forfeiting the tax benefits, if you instruct one trustee to transfer the funds directly to another. However, some custodians--notably insurance companies--punish suck fickleness by levying fees of up to 10% of the amount in your account if you move it elsewhere. Once a year, you can reclaim your IRA funds for 60 days in a rollover: this can serve as a kind of short-term, interest-free loan to yourself that preserves the tax benefits, but you must redeposit the funds in an IRA.


(Miller 38). While your long-term goals should help you balance your investments between growth and income, you should make the most of timely opportunities in your day-to-day tactics. Since most economists foresee a steady recovery this year, the stock market should be a solid bet, with the Dow perhaps hitting 1450 during the year. Interest rates should decline by a percentage point or so in the first half, then wind up the year about where they are now. Because real interest rates (nominal rates less inflation) are close to historic highs, fixed-income investments such as bonds or bond funds have much to recommend them. In addition, insurance companies offer annuity IRAs, but their performance occasionally is lackluster and their fees can be high. (For more on fixed- and variable-rate annuities, see the story on page 93).


The attractive wares offered by other IRA custodians include the following: Bank IRAs. Their appeal is, in a word, safety. CDs, the staple of commercial bank and savings and loan IRAs, are federally insured up to $100,000. You can open a bank IRA by depositing as little as $25. Banks and S&Ls usually don't charge IRa management fees. And once you invest in a CD, you can relax until it comes due months or even years later.


If you expect interest rates to decline, a fixed-interest CD is a good way to lock in today's high returns: 9.25% for six months, 9.65% for 12 months and 10.22% for 30 months, on average. Instead of a fixed CD, you might prefer a variable one with rates that are adjusted every few weeks in line with money markets. The price of this protection: an initial yield roughly a percentage point lower than on fixed CDs. And if rates fall, so does the yield. (Chisel 92). Insured bank money-market accounts also typically yield three-quarters to one percentage point less than a six-month fixed-rate CD.


And the recent elimination of the $2,500 minimum deposit for IRA investors makes the accounts more attractive. At some banks you also c ...................................................................................................................................................................................................................................................................................................................................................................

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Essay Tags: mutual fund, mutual funds, interest rate, fund, bank

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