Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: MONDAY, May 29, 1995                   TAG: 9505300011
SECTION: MONEY                    PAGE: 4   EDITION: METRO 
SOURCE: MAG POFF STAFF WRITER
DATELINE:                                 LENGTH: Medium

IF YOU'RE UNDER 59 1/2, IRA FUNDS NOT LIQUID

A: Individual Retirement Accounts are not liquid investments if you are under the age of 59 1/2.

Mutual funds each have their own fees and rules, so you must read the prospectus to determine the annual fees levied against the fund and, more importantly, whether it has a rear-end load, a fee that would make it costly to withdraw money from the fund. If you buy shares through a broker, you also will pay a sales commission up front.

You should have no problem withdrawing funds quickly from a mutual fund. The problem comes when you deal with an IRA, regardless of what it is invested in.

If you are under the age of 591/2 (and not disabled), you would pay all taxes due plus a penalty of 10 percent if you withdraw funds from an IRA. The only exception is a plan that allows you to withdraw funds in equal amounts over the term of your life expectancy, which must be followed for a minimum of five years unless you turn 591/2 before that time. This gives you very little money each year.

IRAs are designed for retirement, so they are illiquid. You cannot reach the money easily. If you invest in an IRA, you should use money that you can spare for the long term. You should have an emergency fund of three to six months' salary in an easily accessible account before you begin investing for your retirement and other long-range goals.

Investor urged to roll

IRA into mutual fund

Q: I have $1,000 in a bank Individual Retirement Account with the interest rate at a little over 3 percent. I also have a pension, which I rolled over into an annuity when I left my previous job. This annuity earns a little better than 5 percent. If I add to it, I will earn an extra 1 percent on the addition. I also participate in an employee pension plan which offers a cafeteria style approach to retirement planning (mutual funds, money market, fixed accounts, etc.).

I am considering closing out and rolling over my IRA. Should I put this money into the annuity or into my current pension plan (if possible)? I want to do this without paying a penalty. Which would you suggest, or do you have other ideas? I am young and willing to take moderate risk, but my income isn't very large.

A: You won't be able to combine your IRA with your employer's pension plan, according to David Cissel, a certified financial planner with Financial Solutions in Roanoke. He pointed out that you would be able to transfer it to a rollover IRA with another company without a penalty.

But he would not advise investing your IRA in an annuity.

Cissel explained that one reason for the popularity of annuities is that they have the advantage of deferring income tax. Because the earnings on your IRA are already tax-deferred, there is no additional tax advantage in investing your IRA in an annuity.

Secondly, he said, he believes you could do better than the return you are receiving with your annuity since you are willing to take moderate risks.

Common stocks have earned in excess of a 10 percent average return since 1924, outperforming other classes of investments over the long run, Cissel said. Although there is no guarantee that they will continue this rate of return, his suggestion would be to roll your IRA into a mutual fund that invests in common stocks. Because you are young, you have the advantage of a longer time horizon for your investment to grow. This will tend to smooth out the effect of short-term fluctuations in the stock market.

Cissell gave an example of the power of having a higher rate of return on your investment over time. If you were to put your $1,000 in an investment that earned a 10 percent annual rate of return and left it alone for 40 years, it would be worth more than $45,000. If you were to add $1,000 per year to that same investment, you would have $487,851 in 40 years. The same $1,000 investment with annual additions of $1,000 invested at a 6 percent rate of return would be worth $165,048 after 40 years.

In choosing a mutual fund, you will want one that has a good track record and a reasonable annual maintenance fee. There are many mutual funds that have annual maintenance fees of $15 or less per year for an IRA account.

By starting early, contributing regularly in an IRA or company pension plan and concentrating your investments in mutual funds, you should be able to accumulate a significant amount by the time you are ready to retire.