Your IRA Guide. Banks, mutual funds, brokers, insurance companies -- consider the pros and cons before choosing the best

Some people are looking for the best place to open their first individual retirement account. Others are looking for a place to open a second IRA or somewhere to spread existing -- and growing -- IRA money around. While the number of choices has grown significantly, with products like CATS, TIGRS, zero-coupon bonds, money market deposit accounts, and mutual funds begun just for the IRA market, almost all of these investment options can be found at four basic types of firms.

This list, along with the table at the bottom of this page, presents some of the pros and cons of these IRA choices. Banks: In 1982, this was the most popular location for IRAs. Banks and savings and loan associations garnered over 70 percent of the early IRA deposits. That share has slipped, but banks and S&Ls remain one of the most popular IRA investments. For people who want absolute safety and a guaranteed interest rate, certificates of deposit offer this, plus federal deposit insurance up to $100,000. Also, fees for opening an IRA are very low. Some banks, in fact are not only charging no fees, they are offering small cash bonuses or gifts for new IRA accounts.

One disadvantage is that some banks and thrifts charge a heavy penalty for early withdrawal, even though the Internal Revenue Service won't penalize you if you take the money out and put it into another IRA within 60 days. So, if you buy CDs for your IRA when interest rates are low, you could end up on the short end of things if rates go up very much. You can get more flexibility by putting your money in one of the newer money market deposit accounts, but the yield will be lower. Mutual funds: These have been one of the fastest-growing vehicles for IRAs. They offer considerable flexibility, ranging from highly conservative money market funds investing in US Treasury bills, to aggressive stock funds. If conditions in the economy or securities markets change, investors in fund ``families'' with several funds can move from one fund to another with a phone call. In a no-load fund this can be done at no charge.

There have been, however, numerous complaints to the Securities and Exchange Commission about funds that were slow about transferring money from their company to another, or to a bank or broker. To get around this, you can take advantage of the once-a-year rollover provision, allowing you to receive a check from the fund directly and reinvest it elsewhere yourself within 60 days.

With the exception of money market funds, mutual funds can also experince a loss in principal, as their net asset values, or share prices, can fluctuate. Last year, for example, the average equity fund underperformed the Standard & Poor's 500 index, and some that did very well in 1983 did very poorly in 1984. Brokers: If you like to make your own investment decisions, with perhaps some guidance from a broker, self-directed IRAs may be for you. Not only can you invest in stocks and bonds, you can have access to the options markets, limited partnerships, as well as mutual funds and government securities.

On the other hand, even discount brokers may charge more to take your money and make purchases and sales than you would pay to a bank or mutual fund. And a full-commission broker will probably be the most expensive of all. (If this broker has made a lot of money for you, though, the higher commission could be worth it.) Also, while you and your broker may be fairly good at picking stocks, the overall performance of your IRA portfolio is subject to market conditions beyond your control. Insurance companies: There are two basic annuity products offered to the IRA market. Both guarantee regular payments for a certain number of years or the life of the policyholder. Fixed annuities guarantee you a minimum specified rate of return, while variable annuity contracts can change, depending on how well the investments in the portfolio perform. These investments can either be chosen by the investor or selected by the company, depending on the firm and/or the policy.

Fixed annuities give you a guaranteed rate, but they might not hedge against inflation. Variable annuities, particularly those that let you select among a group of investments -- usually mutual funds -- offer more flexibility, but their performance is subject to changes in the market.

Then there are the high upfront fees, or commissions, that insurance companies charge. It could take your policy several years to earn back the money lost to these fees. There are, however, insurance companies that charge very low up-front commissions, or no commission at all, if you leave the money with them for a minimum number of years. There may also be stiff penalties for early withdrawal. Chart: Alternative investment vehicles for IRAs Investment Benefits Limitations Certificates of deposit -- fixed rate of return -- may not always hedge against inflation

-- rate of return

likely to be lower,

since less risk is

involved

-- penalties for early

withdrawals Mutual funds -- liquidity -- performance subject to

-- ability to switch market fluctuations

among various funds

-- professionally

managed portfolio of

stocks bonds, money

market instruments

-- potential to outperform

fixed-rate-of-return

investments Variable annuities -- liquidity -- performance subject to

-- ability to switch market fluctuations

among various funds -- penalties for early

-- professionally withdrawals

managed portfolio of

stocks bonds, money

market instruments

-- potential to outperform

fixed-rate-of-return

investments

-- guaranteed income for

life based on performance

of investment Fixed annuities -- fixed rate of return -- may not always hedge

-- guaranteed income against inflation

for life -- rate of return that tends to be lower:

less risk involved

-- penalties for early

withdrawals Zero-coupon bonds -- fixed rate of return -- possible market penalties

-- wide range of if redeemed early

maturities -- does not hedge against

inflation Common stocks/bonds -- flexibilty in -- limited diversification

structuring portfolio -- performance fluctuates

-- liquidity according to investment

-- potential to outperform selection and market

fixed-rate-of-return conditions

investments Real estate -- traditionally keeps -- limited liquidity limited partnerships pace with inflation

-- relatively low risk

-- potential for income

and capital appreciation Oil and gas income -- potential inflation hedge -- limited liquidity limited partnerships -- potential for income

-- limited supply of oil

(may result in

increased

prices over long term) Based on information provided by New England Mutual Life Insurance Company.