Following is another in a series of columns on Individual Retirement Accounts:
If the family of funds idea that we talked about last week doesn't provide as much flexibility in control of your IRA investments as you would like, you can turn to a self-directed account.
Self-directed IRAs are available at most brokerage offices. As the name implies, you make all the decisions on how much of your IRA money to invest where.
You can invest any part or all of the funds in common or preferred stocks, bonds, real estate investment trusts, mutual funds (including money market funds), government securities or unit investment trusts.
Of course, the account is restricted by the standard prohibition against collectibles and the prescribed age and dollar limitations. Aside from those rules, common to all IRAs, you have virtually complete freedom to manage your account.
That is the theory, at least. There are some practical limitations. With $2,000 to work with--which is all you can invest the first year--you're not going to be able to buy 100 shares of AT&T or IBM.
Which leads to the major problem with a self-directed account: the charges. You may have to pay $20 or $30 initially to establish the account; perhaps $25 or more each year in management fees; plus the normal brokerage charges on all trades.
Unless you really feel a compulsive need for total control or think you can do so much better than the professional managers that you can make up for the high costs, I suggest you start your IRA elsewhere.
But a few years down the road--when accumulated deposits plus earnings reach perhaps $8,000 or $10,000--then a move to a self-directed IRA might make a lot of sense for a sophisticated investor willing to spend the time needed to manage the account.
There is still one more place for your IRA money--the company pension plan where you work. This can be either an existing plan which has been modified to accept IRA-qualified voluntary contributions or a new employer-sponsored IRA vehicle.
Not many employers are going this route because of the administrative workload involved. If your company does offer this option, examine the plan just as you would any other IRA program, in terms of costs, investment philosophy and anticipated performance.
One advantage of an employer-sponsored plan (which may not be very important in your particular planning): The rule that you must initiate withdrawals by age 70 1/2 does not apply to company plans.
Some employers may provide an opportunity for employe-selected IRA payroll deduction plans. The paperwork involved makes it impractical for the employer to offer each employe a free choice of investment media.
So the employer will generally select a limited number of options to be made available--perhaps the company credit union, one or two insurance companies plus one or two fund families.
This limitation on free choice appears to be legal as long as the employer makes it clear to employes that the program is entirely voluntary, that the employer is not endorsing any of the products offered and that there are other IRA vehicles available outside the company plan.
A payroll deduction plan makes the IRA bite less painful for most people than writing a check, and makes skipping deposits less likely. Dollar-cost-averaging is an automatic byproduct if you're investing in a market-sensitive vehicle like a common stock mutual fund.
("Dollar-cost-averaging" is the investment of a fixed number of dollars at regular intervals, resulting in the purchase of more shares when the price is low and fewer shares when the price is high.)
On the other hand, if you opt for payroll deduction you give up the tax advantage you can achieve by investing the entire IRA amount early in the year so that the full year's earnings are protected from tax.
IRA sounds great; how do I start?
The various sponsors of IRA programs have done their best to make it easy and painless to initiate a program.
All of them have standardized contract/application forms that have been pre-approved by the IRS. All you need do is complete the application (including naming a beneficiary) and turn it over to the sponsor with your first check--and you're in the IRA business.