[Note: This column originally ran on March 9, 1998.]
Drips are long-term investment vehicles. IRAs are long-term investment vehicles. Seems like a perfect marriage, right?
No in-laws!
What better way to contribute to your self-directed IRA than with commission-free investments in America's leading companies for years and decades to come? Not so fast, though. There a few obstacles to overcome in order to achieve this blissful union.
The Internal Revenue Service, in all its might and sovereignty, has deemed that a financial institution must act as a custodian for an individual retirement account (IRA). Brokerage houses are customarily custodians for IRAs, but may be somewhat hesitant to house an account that will generate virtually no commissions. They may have to lean on exorbitant fees to make it worth their while, thus reducing the luster of the plan. Most brokerage firms charge an annual fee of up to $50 in addition to commissions on any trades in an IRA account. The few brokers that offer this service with minimal fees and commissions are well worth seeking out.
Banks and Credit Unions are another possibility and may be more receptive to the notion, especially if you've built up a personal relationship with them over time. Drop by that local branch and pleasantly inquire about the possibilities. Heck, even shower them with gifts from FoolMart to soften them up a bit. (Yeah, I realize that was shameless.) If you're like me, however, and you do all your banking online, this may not be as feasible a solution.
So, you've searched far and wide and still cannot find an acceptable custodian. Must you slump your shoulders in defeat and give up that life-long dream of combining Drips with an IRA? Yes.
Okay, just kidding.
There are also a few companies out there that offer an IRA option within their direct investment plan. The company or its agent acts as the custodian for the account and contributions are added to the plan, avoiding a broker or bank altogether. These plans are usually accompanied by an administration fee upwards of $50, comparable to those of brokerage houses. The following is a partial list of companies that offer an IRA option in their Drips:
- Atmos Energy Corp.
- American Electric
- Connecticut Energy Corp.
- Connecticut Water Service, Inc.
- Exxon Corp.
- Ford Motors
- Houston Industries
- Mobil Corp.
- Morton International, Inc.
- SBC Communications, Inc.
- UtiliCorp United, Inc.
- Wal-Mart
I'll add more companies to this list on the Drip Companies discussion board as I become aware of them. Please contribute any that you are aware of as well.
Hopefully, this has provided you with some useful information for which to begin the process of Dripping into an IRA. I'd like to close with two things to remember about IRAs when considering this possibility.
- Only cash can be used to fund an IRA. Existing DRPs cannot be transferred.
- Annual contributions are limited to the lesser of $2,000 or 100% of the individuals earned income for the year.
Have a fine and Foolish evening! I'll see you on the message boards!
--Vince Hanks
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