In honor of Financial Literacy Month, Jean Chatzky, author and financial editor for the Today Show, is personally responding to five consumer questions. Today, Jean answers Patricia’s question about opening an IRA.
Question: I have an IRA and would like to know if it is best to transfer it to my job retirement fund or to an Roth IRA? I stopped putting money in it because it was a very small amount and it seem to be getting depleted overnight with service charges. Will I be taxed on these moneys when I draw it out even though it was taxed prior to depositing them to my IRA? -Patricia
Answer: Hi Patricia, I’m wondering what you’re investing in – and thinking it’s the charges on your mutual funds that are depleting your returns. Custodial fees shouldn’t be taking that big a bite. And if they are you have your IRA in the wrong place. Generally, banks have the lowest custodial IRA fees followed by mutual fund companies, then brokerage firms and finally trust companies. You should be able to find a home for your IRA for less than $20 a year. Then you want to minimize fees on the investments themselves by purchasing a simple, broad index fund or two and sticking to them. As for your more specific question, I wouldn’t move the money to your job retirement fund because you’ll be limited in your investment choices. Converting to a Roth IRA makes more sense if you can afford to pay the taxes, which shouldn’t be all that great because you won’t be taxed on the principal, just on any gains you’ve accrued. Then figure out if the money you’re putting into your retirement account at work each year is enough to fund you’re retirement. If not, try to continue pumping some money into this Roth every month automatically as well. Good luck! -Jean Chatzky