Lump Sum--Choosing a Destination
By now, you have probably heard the arguments in favor of individual retirement accounts. An estimated 73% of mutual fund shareholders have at least one fund in an IRA, with the proportion split fairly evenly among men, women, load and no-load buyers.
But do you really know how to shop around to find the best fund company for your IRA needs?
That question took on added weight Jan. 1, when an important tax-law change regarding pension distributions came into effect.
From now on, any time you make a lump-sum withdrawal from a company retirement plan, including 401(k) programs, the government will withhold 20% of your distribution if you are not careful.
The only ways to get around this provision--and keep your nest egg intact--would be to keep the money in your former employer’s plan, if the company allows it, transfer it into your new employers’s plan or transfer it directly to an IRA.
The new rule not only affects people who retire, but also those who quit, are fired or laid off, assuming they withdraw their retirement money in a lump sum.
By law, the human-resources department at the company you’re leaving is required to provide clear, explicit explanations of the tax implications of not reinvesting a lump sum, says Ellen Feinsand, vice president of retail marketing for Fidelity Investments, the Boston-based fund giant.
Your ex-employer is also obligated to inform you of your option to keep the money in the company’s plan, provided you have at least $3,500 invested, she adds.
But if you want to transfer the money somewhere else--possibly a wise choice if the company plan has limited investment selections or lackluster performance--you will probably be on your own.
“Almost no companies will give that level of (investment) advice,” Feinsand says.
Mutual fund companies generally are good destinations for IRA-transfer dollars for the same reasons they appeal to investors in taxable accounts. These companies usually offer professional management, a diverse selection of funds and investment options, and low minimum investments.
Nearly all fund groups accept IRA rollovers. Many firms require smaller dollar investments in IRAs than in taxable accounts.
Most groups will let you transfer retirement money into any type of fund except for municipal-bond portfolios, for which a duplication of tax shelters wouldn’t make sense.
IRA account-maintenance fees generally cost about $10 to $15 per fund annually, although some can go $40 or higher. Many fund groups also impose fees to open or close an IRA. These range from a couple of dollars to about $50 per transaction.
A few companies, bearing in mind that you might own several funds or want to switch money around, will cap your cumulative IRA fees at about $30 a year, as does Twentieth Century Investors of Kansas City.
The Janus Group in Denver gives investors the option of limiting their cumulative lifetime IRA fees for all fund holdings to $100.
Another way to keep IRA fees at bay is to buy funds through a brokerage, at which you often will pay a single fee.
Charles Schwab, Fidelity Investments and Jack White & Co. are among the discount brokerages that offer no-fee IRAs for mutual fund investors, subject to certain restrictions.
For the most part, however, IRA fees are modest and shouldn’t be the key reason you pick a certain fund group as a rollover destination.
The key criteria for picking fund groups as a rollover destination are the fund’s investment preferences and its track record in getting a good return for its customers. You should also take into account any sales charges, per-share operating expenses and other costs.
When analyzing fund groups, you might want to pay most attention to each group’s stock portfolios.
“The greatest differences between families exist here, particularly in performance,” says Sheldon Jacobs, an investment adviser in Hastings-on-Hudson, N.Y., and editor of the Handbook for No-Load Fund Investors.
No-Fee IRA Families Most mutual fund companies charge annual fees for investors in individual retirement accounts. The following are among the relatively few groups that offer no-fee IRAs on some or all of their funds.
Funds Fund Family Phone Minimum Available AARP Investment Program 800-253-AARP $250 5 Analytic Optioned Equity 800-374-2633 None 1 Benham Group 800-321-8321 $100 17 Citibank IRA CIT Portfolios 800-522-5212 $250 4 Fidelity Investments 800-544-6666 $5,000 96 Gateway Funds 800-354-6339 $1,000 4 IAI Funds 800-927-3863 $2,000 12 Laurel Funds 800-548-2868 $250 6
Note: Certain restrictions may apply on some funds. Fidelity charges a $10 annual fee on IRA fund investments below $5,000. The Fidelity IRA fund total excludes 37 money-market portfolios that are available to IRAs but generally not appropriate.
