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.

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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.

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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Dorm insurance

My son is about to start his freshman year in college. Will my homeowners insurance cover all the things he's planning to bring to his dorm room?

-- B.P., Severna Park, Md.

Your son's stuff is probably safe. Children are generally covered by their parents' homeowners insurance if they're living in a dorm. But ask your agent or company about any limitations. Some policies, for example, limit protection to 10% of your total coverage for possessions.

Your homeowners policy generally won't cover a child who lives in an off-campus apartment. In that case, buy a renters policy for $200 to $300 per year. Be sure to tell the insurer that your child's name is on the lease.

Mutual fund charges

A Merrill Lynch broker told me that mutual fund expenses will even out regardless of whether I buy Class A, B or C shares. Is this true?

-- Dennis Mann, York, Pa.

Not exactly. But at least your broker didn't try to sell you the bill of goods that Class B and Class C shares levy no sales charges. They do.

A quick review of fund alphabet soup: Class A shares come with front-end commissions and small (on the order of 0.25% per year) 12b-1 fees, which are also used to compensate brokers. Class B shares carry fatter 12b-1 fees (typically 1% per year), combined with gradually declining redemption fees. Class B shares usually convert to lower-cost A shares after a period of time. Class C shares also come with fat 12b-1 fees, along with a 1% redemption fee that usually disappears after one year. Class C shares generally don't convert to A shares.

Total costs for owning each share class will vary depending on how long you hold the shares, your return and the size of your investment. With A shares, for example, you get a break on the load when you invest amounts beyond certain breakpoints; those discounts aren't available with B and C shares. To estimate how much you'd pay in fees for each share class, go to www.nasd.com and select the Mutual Fund Expense Analyzer.

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The medigap gap

My mother is paying $171 per month for her Medicare supplement insurance policy. Is that premium about right?

-- Connie Mayes, via e-mail

It seems to be in the ballpark, but specifics can vary a lot depending on your mother's age, where she lives and the type of policy she has. The average cost for the most popular medigap policy, called Plan F, is $1,813 per year for a 65-year-old woman, according to Weiss Ratings -- just a little less than the $2,052 your mother is paying.

Still, it's a good idea to reshop your mom's coverage with other companies. On paper, the government created 12 standardized medigap plans, labeled A through L, with every Plan A, for example, offering identical coverage. But the price range can be significant. A 2005 study by Weiss Ratings reported that annual premiums for a 65-year-old woman buying Plan F ranged from $516 to $10,789 -- and that's no typo.

Also, the new Medicare prescription-drug program has introduced attractive alternatives. Thanks to generous government subsidies, Medicare Advantage plans -- which cover health care as well as prescription drugs -- are more common, more flexible and less expensive than in the past. In some cases, you pay no premium other than the standard fee for Medicare Part B.

Medicare Advantage plans used to be just HMOs. But now some of them let you use any doctor who accepts Medicare patients under a private fee-for-service arrangement or doctors who belong to regional PPOs -- large networks that span several states. To learn which options are available in your area, see the Personal Plan Finder at www.medicare.gov/mppf.

Powerhouse stocks

A well-respected investment-advisory service to which I subscribe strongly recommends Microsoft and General Electric as solid growth stocks. Yet both stocks have performed miserably over the past three years. Your thoughts?

-- Richard Morse, Peoria, Ariz.

GE and Microsoft have been stinkers for far longer than three years. GE (symbol GE), which traded at $32 in mid July, peaked at $60.50 in 2000. Microsoft (MSFT), recently at $22, crested at $60 in late 1999. One problem for both stocks is being a leader in a segment of the market -- large-company growth stocks -- that has been out of favor since 2000. Moreover, each company has become so large (GE, with a market value of $344 billion, is the second-largest company on the planet, and Microsoft, with a value of $232 billion, is the fifth-largest) that it's becoming increasingly difficult for them to grow as quickly as they did in the past.

That said, both GE and Microsoft remain financially powerful companies that should be able to generate low-double-digit annual earnings growth for at least the next few years. Microsoft, which holds a huge cash stash, should get a boost when it unveils its new Vista operating system and Office 2007 sometime during the fiscal year ending next June. GE -- sometimes called General Eclectic -- is extremely well diversified in the finance, media and health-care sectors, in addition to appliances and industrial products. The company has raised dividends 30 straight years, and it has announced plans to buy back $25 billion worth of shares through 2008.

As for the punk stock performance, it enhances the attractiveness of the shares from a value perspective. Microsoft trades at 17 times estimated calendar 2006 earnings. True, that's 13% greater than the price-earnings ratio of 15 for Standard Poor's 500-stock index. But before 2001, Microsoft traded at a much higher P/E. Ditto for GE, which sells for 16 times '06 profit estimates. In sum, both stocks are well worth holding for the long term.

My thanks to Tom Anderson and Manny Schiffres for their help this month.