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Get a Fee Free IRA

My wife, Susan, has an individual retirement account with Prudential Financial. The IRA has a balance of $7,100, invested in a money-market account. We are being charged a $100 service fee by the company. I have been on long-term disability, and my wife is not working. Should we move our money to an account with another company? Or should we withdraw it, pay the taxes and penalties, and open a taxable account?
-- James Kelly, Brandon, Fla.

Good news, James. Prudential Financial refunded the $100 service fee on Susan's IRA and switched it to an account with no service fees after we brought your situation to Prudential's attention. Customers should know that investment companies will sometimes waive charges in cases of financial hardship. Each company has its own policy, but it never hurts to ask for a break if you need it.

Susan's small nest egg hatched a big fee because it's with a full-service brokerage. For investors with small balances, using a full-service broker for your retirement savings can be like renting a John Deere tractor to till your flower garden.

You have plenty of fee-free choices. Charles Schwab lets you start an IRA with no annual service fee for as little as $2,000. Fidelity doesn't charge a service fee for IRA balances of $2,500 or more. Vanguard waives service fees on accounts with $5,000 or more.

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Paying college bills

I have money in several accounts to pay for my children's college tuition. Most of it is in a 529 plan, but some is in a Coverdell education-savings account and some is in a custodial account. Which should I use first to pay college bills?
-- E.S., Salt Lake City

Taxes are the deciding factor. First determine whether you qualify for the Hope or lifetime-learning tax credit. If so, don't pay the full tuition bill from a 529 or a Coverdell account. College withdrawals from those accounts are already tax-free, and you are not permitted to double up on tax breaks.

You're eligible for the Hope credit if your adjusted gross income in 2006 is less than $110,000 on a joint return (or $55,000 if you're single). In that case, you get a tax credit of up to $1,650 per child in each child's first two years of college. In order to claim the credit, however, you have to pay at least $2,200 of your bill from an account other than a 529 or a Coverdell. So in this situation, it makes sense to tap the custodial account.

After your child's first two years of college, you may qualify for the lifetime-learning credit of up to $2,000 per tax return. You have to meet the same income requirements as for the Hope credit, plus you have to pay at least $10,000 in college bills from a source other than a 529 or a Coverdell.

Earn too much to qualify for either the Hope or the lifetime-learning credit? Assuming you meet the income requirements -- less than $160,000 on a joint return or $80,000 if you're single -- you may be able to take a tax deduction for up to $4,000 in tuition and related expenses. But, again, that money can't come from a 529 or a Coverdell account (see IRS Publication 970, Tax Benefits for Education, at www.irs.gov).


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