ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, April 1, 1996 TAG: 9604010097
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
More people than ever before are turning to mutual funds for their Individual Retirement Accounts, according to Mike English, manager of the main branch of First Union National Bank of Virginia.
English said the bank is selling mutual funds in place of certificates of deposit, which once made up the bulk of IRA investments.
Many people still like the insured safety of certificates of deposit, English said, but he points out that they are making little money when CDs earn 4 percent to 5 percent while inflation is running at 3 percent.
The chart accompanying this story shows the rates paid last week on insured certificates for IRA accounts at Roanoke Valley banks. Mutual funds are sold by banks and brokers and by the funds themselves through direct advertising. But unlike traditional bank accounts, they are not covered by federal deposit insurance.
Tyler Pugh, senior vice president at Wheat First Butcher Singer in Roanoke, said he recommends mutual funds for anyone with a long investment horizon who can contribute $2,000 a year to an IRA. Mutual funds, Pugh said, offer investors diversification and generally expert management.
People who set up self-directed accounts at a bank or brokerage house can put their retirement money into virtually any investment except collectibles. It makes no sense, however, to use the tax shelter of an IRA to invest in a tax-advantaged vehicle such as municipal bonds and annuities.
Now is the prime time for IRA investments because money is being socked away for two separate tax years. You can make your 1995 investment until you file your current tax return, but no later than April 15. At the same time, you can make all or part of your contributions for 1996.
Singles and couples who lack a pension plan at work can take a deduction on their income taxes for any amount contributed to an IRA up to the annual ceiling of $2,000 a person.
If you or your spouse is covered by an employer's pension plan, you can take a deduction on your income taxes for the contribution provided your adjusted income is no more than $40,000 for a couple or $25,000 for a single person.
The deduction is phased out until it disappears for couples with incomes of $50,000 and singles earning $35,000. For instance, a married couple earning $45,000 is eligible for a $1,000 deduction.
You cannot, however, contribute more than you earn. You must have earned income of at least $2,000 to contribute up to the ceiling.
There is an exception for nonworking spouses. A couple can establish two IRAs and contribute a combined total of $2,250, but neither account can exceed $2,000. If both spouses earn at least $2,000, they can each contribute the maximum to an IRA.
Even if you cannot take a deduction for the contribution, setting up an IRA each year is a good investment because the earnings accumulate on a tax-deferred basis.
When you withdraw the money at retirement, the earnings are taxed along with any contribution that was deducted. If you could not take the deduction, that portion of the money will not be taxed provided that you file - and retain - Form 8606 each year.
LENGTH: Medium: 62 lines ILLUSTRATION: GRAPHIC: chart - Current IRA ratesby CNB