Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, March 30, 1992 TAG: 9203270495
SECTION: BUSINESS PAGE: A-9 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Medium
This year, however, IRA money is flowing from banks into brokerage houses, chasing higher yields and a chance for long-term growth.
April 15 is the deadline for contributing to an IRA for 1991. Simultaneously, some investors are putting money into their accounts for the current year.
So this is the busiest season for new IRA contributions. And many people whose existing IRAs are in maturing bank certificates now face the question of reinvestment.
Shearson Lehman Brothers Inc. said about $400 million in bank CDs will come due in April nationwide. Nearly 40 percent of that, or $160 million, is in retirement accounts.
Several local brokers said customers, disenchanted with low interest rates, are rolling over existing IRAs and opening new accounts with investments at their firms.
Many people are moving money out of banks because of low interest rates, the brokers said. But some of that money is coming from IRAs that were in CorEast or Trustbank federal savings banks, thrifts recently closed by federal regulators.
Stephen Williams, vice president and manager of the Roanoke office of PaineWebber, said most new customers are opting for mutual funds - either bond funds or total return equity funds. The latter type of fund seeks dividend income as well as an opportunity for capital appreciation in stock values.
He encourages clients to look at bond and stock funds. Although the principal fluctuates, Williams said, over five years or longer a well-managed equity fund will outperform certificates of deposit and money market funds.
People with large amounts of IRA money often create a self-directed account to invest in a portfolio of individual stocks and bonds, Williams said.
Older people with less than $10,000, he advises, should invest in mortgage-backed securities, such as Ginnie Maes and Freddie Macs, or into zero-coupon government bonds.
Zero-coupon securities do not pay periodic interest, meaning they are sold at deep discounts from their face values. The gradual appreciation means they are redeemed for the face value at maturity.
Treasury zeros with maturities of eight to 10 years returned 7] to 8 percent last week, while Freddie Macs yielded 8\ percent.
Richard Wertz, vice president at A.G. Edwards & Sons in Roanoke, said investment of IRA money should vary with the age of the person.
He advises younger clients to invest in growth mutual funds. People approaching retirement, he said, should buy something like Ginnie Maes that last week returned just over 8 percent.
Dean Penley, manager of the Roanoke office of J.C. Bradford & Co., said most new clients taking money out of banks are putting it into mutual funds.
Most people are choosing growth funds for the long term, Penley said. Fewer are opting for bond funds or funds that invest in Treasuries, last week paying 7 1/2 to 8 percent.
Shearson Lehman said yields make a dramatic difference in dollars available for retirement. A $20,000 IRA will grow over 15 years to $36,019 earning 4 percent in a CD, the company said. The same investment would swell to $63,443 in a top quality AAA zero coupon bond at 8 percent. That's a difference of $27,424.
Taxes on all IRA earnings are deferred until the money is taken, usually at retirement.
Anyone who is not covered by a retirement plan at work can deposit any amount up to $2,000 a year and deduct the contribution from income taxes. If one spouse is not employed, up to $2,250 can be divided between two accounts.
Those who have a retirement plan at work can claim the full deduction if their income is no more than $25,000 for a single person or $40,000 for a couple. You don't have to itemize income tax returns to take the IRA subtraction.
The deduction begins to phase out at higher income levels. Contributions cannot be claimed at all by singles earning $35,000 or couples with income of $50,000, although taxes are still deferred on the earnings.
IRA accounts can be moved once a year by the depositor, but they can be shifted directly from one plan to another any number of times.
People can have more than one IRA account, allowing for diversification.
Although the type of investment can be changed at any time, the IRA cannot be terminated prior to the age of 59 1/2 without payment of a 10 percent penalty along with any deferred taxes. The money can be taken early in case of disability or use of a life-annuity withdrawal plan without those penalties.
The government penalty is in addition to fees a bank might impose for withdrawal prior to maturity.
by CNB