IRA Sponsors Must Now Disclose
QUESTION: About three years ago, I enrolled in an IRA that was offering a fixed interest rate of 15% for five years. It has proven to be a great deal. But I’m troubled by something I recently discovered and that the bank neglected to tell me. After a conversation with a friend about the annual “account service fees” the bank charges, I dug out my IRA records and discovered that the bank didn’t take these fees into account when they worked out my projected earnings over a period of five, 10 and 20 years. In other words, it isn’t quite as good a deal as I was led to believe. Isn’t there a law against doing that?--R. Y.
ANSWER: Prodded by years of vocal criticism by some consumer watchdogs, a few financial institutions and other managers of individual retirement accounts in recent years have voluntarily subtracted such fees from the calculations that they give new IRA participants. But not until this summer were they required by law to do so.
In a recent revenue ruling--No. 86-78 for those of you who want to check out the details--the Internal Revenue Service instructed IRA sponsors to tell consumers signing up for an IRA how much they can expect to receive upon retirement. That means that IRA participants must from now on be given an earnings projection based on the actual interest rate that they are being offered and on the service fees, if any, subtracted periodically from the account.
IRA sponsors have been required for years to give account-holders a written projection. But the rule was so ambiguous that most financial institutions simply distributed generic projections. Often, they were based on a hypothetical interest rate that in some cases bore little resemblance to the going market rate. And rarely did they take into account such charges as trustee fees and penalties for early withdrawals--charges that can make a difference of thousands of dollars over 25 or 30 years.
Now, IRA sponsors must be much more forthcoming. It is no longer adequate for them to disclose their fees and penalty schedules separate from the interest-earnings projection. They now must provide a calculation tailored to the exact IRA in which the consumer is enrolling.
None of this will help you with your current five-year IRA, of course. But the next time you open an IRA, you can expect a projection much closer to reality.
Q: I overheard a conversation on a plane to Los Angeles the other day about rental cars now being equipped with telephones. That would be very convenient for me, but I can’t seem to find anybody who is offering the service. Can you help?--T. G.
A: The service is just beginning to catch on, so it may be a few months before you find phone-equipped rental cars in the cities where you do business. At the moment, however, you should include Budget Rent-a-Car on your list of inquiries.
Budget is a leader in this field, with phone-equipped cars in 50 U.S. cities. The company says that by this fall, it expects to offer this service in every city where cellular phone service is available.
Expect to pay about $3 a day extra for the convenience, plus roughly 95 cents for each minute you use the phone. These phones are removable, so you can take them with you to meetings, restaurants and the like.
And for those of you who travel by taxi instead of rental car, phones for passenger use are also starting to show up in cabs in some major cities.
Q: Now that tax reform seems a certainty, I am debating whether to discontinue using my accountant. It looks like I am going to lose most of the deductions I take, including the deduction for tax preparation fees. So I can’t see any reason not to start doing my tax returns myself. Is there anything I’m overlooking?--P. V.
A: You’ll have to decide for yourself once the bill emerges in its final form from the House-Senate conference committee. But tax preparers--especially those who handle complicated returns for taxpayers with large incomes--say that for at least a couple of years after the tax laws are changed, they expect virtually no loss of business. Their reasoning? It will take that long for taxpayers to figure out how they’re affected and what their new tax-minimizing strategies should be.
You might also keep in mind that the current bills propose gradual elimination of certain deductions, so you will have to keep track of those pertinent to you should you decide to prepare your own return. In addition, there will be even more extensive record-keeping requirements for taxpayers taking travel and entertainment deductions than those currently required.
Debra Whitefield cannot answer mail individually but will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Los Angeles Times, 780 Third Ave., Suite 3801, New York, N.Y. 10017.
