Description

This article is from the Investing Articles: Mutual Funds series.

No-Load Mutual Funds and IRA's. Withholding. Starting Early

Withholding

Plan administrators now must withhold 20% of a participant's taxable distribution unless the distribution is transferred directly to another qualified plan or into an IRA. For distributions not so transferred, 20% withholding is now required, even if such distribution subsequently escapes current taxation because the recipient makes an IRA rollover within 60 days. Withholding also does not apply to amounts that a participant must receive because he or she reaches the age of 70 1/2.

The difference between a "direct transfer" and a "rollover" is critical. With a direct transfer, the distribution check goes directly from one plan trustee to another, and the participant never lays hands on the money. A rollover, on the other hand, occurs when the distribution check is written to the participant, who then deposits the money into an IRA or another qualified plan within 60 days. Under the new law, withholding is mandatory if the check is written to the participant, even if (s)he rolls the money over.

Now, some leading members of both political parties favor a return to the pre-1986 rule that allowed workers, to set aside as much as $2,000 a year in a tax-deferred account and deduct the contribution from taxable income. In 1986, Congress limited deductible IRA's to people below certain income levels and not covered by company pension plans. Congress is currently considering raising the income levels substantially.

So until Congress acts, IRA's are available only to couples who have no other qualified retirement plan and are making less than $40,000 a year. For single people, without other plans, IRA's are available up to $25,000 of income.

Even if you don't qualify for a deductible IRA, you may want to open a non-deductible account with a 100% no-load mutual fund. While this no longer allows you to deduct $2,000 a year, it does provide tax-free buildup until you take the money out after age 59 1/2.

IRA's are a great way to save for your future. They're one of the simplest tax advantaged retirement plans, and the retirement income you ultimately receive from an IRA can be much greater than the income from a comparable taxable investment. This is true whether your IRA contributions are deductible or not.

The sooner you begin contributing to an IRA, the sooner your savings go to work for your future. The accompanying chart graphically shows the difference an early start can make. And 100% no-load funds make contributing to an IRA easy.

Bob and Joan want to save money. Bob puts in $100 a month in an IRA account for 10 years (total investment $12,000) and then stops. The money remains invested for 30 more years.

Joan puts off saving. She waits 10 years before she starts saving $100 a month. She then keeps contributing for 30 years (total investment $36,000). Both earn a hypothetical annual return of 8%. The results of their investments are shown in the chart and table below.

      AT         BOB'S      SAVINGS      JOAN'S      SAVINGS   
      YEAR:    INVESTMENT    BALANCE    INVESTMENT    BALANCE

        5       $ 6,000     $  7,397     $     0     $      0
       10        12,000       18,417           0            0
       15        12,000       27,438       6,000        7,397
       20        12,000       40,878      12,000       18,417
       25        12,000       60,902      13,000       34,835
       30        12,000       90,735      24,000       59,295
       35        12,000      135,181      30,000       95,737
       40        12,000      201,400      36,000      150,030

Note: Bob and Joan are fictional characters, however, the investment choices depicted are representative of real life decisions. This hypothetical example assumes investment in a tax-deferred vehicle such as an IRA, earning 8% interest annually, compounded monthly. Example does not represent the performance of any particular fund. (Source: Evergreen Group)

For details and professional advice concerning IRA's, Keogh plans, 401(k) plans and other pension and profit sharing plans, contact the managers of 100% no-load mutual funds and consult with your accountant and attorney.

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