Wrinkles to consider in setting up an individual retirement account

People are usually eager to save tax dollars. So the public -- as shown by question to this column -- has considerable interest in one widely available vehicle for deferring taxes on savings, the individual retirement account.

An IRA is a plan whereby people working for an organization without a pension or profit-sharing plan can set aside up to 15 percent of their gross income to a limit of $1,500 each year ($1,750 with a spousal IRA) and deduct those funds from income subject to tax until later. The deduction is taken on Form 1040 when reporting each year.

One frequent question involves a switch in jobs. One year a worker may be employed by a company with a pension plan. But if he switches to a company without a plan, can he set aside 15 percent of his earnings? No -- not until the following year. Any year in which a worker is employed and is an active participant in a plan -- even for one day -- he or she cannot contribute to an IRA during that year. If you have the option of participating in a pension or profit-sharing plan and you elect not be become a part of the organization's plan, you can set up your own IRA. If the organization contributes into a plan trust, you are not eligible for your own IRA even if you terminate your employment before vesting of your interest occurs.

Can IRA accounts be only at a savings-and-loan association or a savings account at a bank? No, again. Generally, IRAs may be established in plans approved by the IRS with insurance companies, banks, savings-and-loan institutions, mutual funds, and with the US Treasury by buying Individual Retirement Bonds. You should be aware of certain hazards with each of these possibilities:

* Insurance company plans for IRAs tend to be afflicted with relatively high costs and less than all earnings within an IRA are exempt from income tax until withdrawn, the rate of interest, appreciation, or both should be at or higher than the inflation rate for the account to prosper. Make sure you understand all costs and the projected earnings rate before deciding on an IRA with a specific institution.

* Banks and savings-and-loans offer IRAs with little or no cost attached to maintaining the trust. Annual fees may range from zero to $25 regardless of how much cash may be in your account. Most accounts are invested in CDs, and earnings fluctuate according to both short- and long-term rates. Thus, you may incur few costs and gain average income. Your account will probably earn less than the inflation rate except for short periods.

* Mutual funds usually offer IRA accounts, and if you select a no-load mutual fund, costs are minimal. Generally, a mutual fund oriented toward a high current income will grow rapidly over a period of years, because earnings are compounded tax free until withdrawn.

* US Individual Retirement Bonds offer security and no cost, but pay less than competitive interest. Early bonds that paid 6 percent interest did not benefit from recent increases even though Series E Bonds benefit from the higher rates beginning with the first six-month anniversary.

Overall, the two best possibilities for investing money in IRA accounts appear to lie with bank and savings-and-loan plans, and with mutual funds.