NEW YORK -- You can still cut your tax for 1993 by starting an Individual Retirement Account. This year it's especially attractive, because IRA fees are being waived.
A survey in November by the trade newsletter, The IRA Reporter, found that 72 percent of 25 representative banking institutions were charging no annual fees for their IRAs, up from 40 percent in 1992. Banking institutions that do levy fixed fees charge around $25 to $50 annually, plus up to $50 when you close the account.
IRA fees are far more common at brokerage firms, insurance companies, trust companies and mutual funds. Although some offer free accounts, mutual-fund IRAs tend to run in the $10 to $15 range with $5 to $10 closeout fees. Life insurers come in at $35 to $50. For existing IRAs that are building up, consider the discount brokerage firm, Charles Schwab; it charges no fees on IRAs worth $10,000 and up.
At The Fidelity Group, there's no fee on IRAs worth $5,000 and up at its discount brokerage arm, at each Fidelity fund, and for IRAs bought through Fidelity's no-load FundsNetwork. The brokerage arm also waives the fee if you make more than two trades a year.
Why are IRA fees vanishing at banks? Because they annoy consumers and aren't worth the hassle, The IRA Reporter found.
Banks also are struggling to hang on to customers, who are deserting certificates of deposit for higher-yielding mutual funds.
For long-term retirement investing, the choice between CDs and mutual funds is a no-brainer. Pay the $10 fee, if there is one, and buy stock-owning funds for growth.
Alternatively, get a no-fee "self-directed" IRA at a discount brokerage firm and use it for buying your mutual funds. A self-directed IRA amounts to a tax-sheltered brokerage account. You can make a variety of investments and buy or sell whenever you like.
Mutual funds usually let you open an IRA with a minimum investment of $250 to $1,000. If you'll make automatic monthly payments, you can often start with as little as $50.
Many investors forget about IRAs, because they're not as aggressively advertised as they used to be. But ignoring them increases your tax. Here are the rules on how an IRA will save you money:
(1) You can tax-deduct your IRA contribution if you meet one of the following conditions:
* You work but don't participate in any company retirement plan. If you're married, your spouse can't be in a plan, either.
* You or your spouse participates in an employer plan, but your adjusted gross income isn't high. Single taxpayers and heads of household can generally take a full IRA deduction if their incomes are less than $25,000; over that amount, your deduction declines, and finally phases out at $35,000. For married couples, those limits are $40,000 and $50,000. If you actively participated in a plan last year, your employer will check the "pension plan" box on your W-2 form.
(2) Even if you can't tax-deduct your contribution, an IRA is worth having because the investment will grow tax-deferred. That's especially valuable for high-income people whose income tax rates went up last year.
Invest nondeductible IRAs separately from any deductible IRAs you own. That will simplify your tax calculations when you draw the money out.
IRA contributions made through April 15 are deductible against your 1993 income. Workers can stash up to $2,000, plus an extra $250 for an account for a nonworking spouse.
A bill now in Congress would enlarge IRAs for nonworking spouses to $2,000. It's a popular proposal and may be attached to other tax-related legislation this year.
But IRAs are peanuts to people who are self-employed. Your main chance is the Simplified Employee Pension (SEP). You can reduce your 1993 taxable income by contributions made up to the due date of your tax return (including extensions).
Figuring SEP contributions is complicated. Suffice it to say that after making adjustments for the self-employment (Social Security) tax, your maximum deduction is 13.04 percent of earnings, up to a contribution ceiling of $30,000. (For tax year 1994, that ceiling will drop to $22,500.)
If you have employees, you have to contribute to SEPs for them, too-- to a maximum of 15 percent of their earnings. SEPs and IRAs are both available from banks, mutual funds and brokerage firms.