March 06, 2003
Individual Retirement Accounts Meet Socially Responsible Investing
by William Baue
IRAs that employ socially responsible investing strategies can help create a more secure financial,
social, and environmental future.
Individual retirement accounts (IRAs) represent one way of planning for the future, by growing
personal retirement savings on a tax-deferred basis. Socially responsible investment (SRI)
represents another way of planning for the future, because SRI helps create a more just and clean
world to retire into by supporting companies with more sustainable social and environmental
policies and practices. These two forward-looking investment strategies can be combined by making
socially responsible investments through an IRA.
"Virtually any SRI investment
that can be made directly can be made inside an IRA," said George Gay, chief executive officer of
the First Affirmative Financial
Network (FAFN), a nationwide network of financial advisers that specialize in SRI. "The
benefits of an SRI investment are the same inside or out. A client can still have screening,
shareholder advocacy, proxy voting, and community investing in an IRA."
There are two
primary types of IRA accounts: traditional IRAs and Roth IRAs. In a nutshell, the difference is
whether the investor wants to pay tax at the time of deposit (Roth) or at the time of withdrawal
"Both IRA types grow tax deferred," said Michael Lent, a financial adviser
with Progressive Asset Management
(PAM), another nationwide network of financial advisers that specialize in SRI.
traditional IRA, you can get a tax deduction in the year you are filing, but you have to pay taxes
when you take the money out," Mr. Lent told SocialFunds.com. "Roth IRA deposits are after-tax, so
they're not deductible, but the advantage is that when you take money out after retirement, you
don't have to pay any taxes on the distribution."
Both traditional and Roth IRAs are
subject to certain restrictions.
"The deductibility of deposits to a traditional IRA is
determined by whether you have a retirement plan at work [such as a 401(k)] and also by your income
level," said Mr. Lent. "You need to talk to a financial adviser to determine your deductibility."
Investors can deposit up to $3,000 into either a traditional or a Roth IRA for the last
tax year through April 15. Those over 50 years old can add another $500.
adjusted gross income level determines whether he or she can make a contribution to a Roth IRA.
Single filers with an adjusted gross income under $95,000 can make full contributions, while those
who earn over $110,000 cannot make contributions to Roth IRAs. Those in the income range between
these two figures can make partial contributions. Joint filers with combined incomes of more than
$150,000 and less than $160,000 can make partial contributions. Those who earn less than the lower
threshold can make full contributions, while those who earn more than the upper threshold cannot
make any contributions to Roth IRAs.
There are several other types of IRAs that can use
both traditional and Roth strategies.
"There are educational IRAs that allow you to put
money away for your children on a tax-deferred basis," said Mr. Lent. "For a self-employed person,
you can do a SEP IRA, which allows you to contribute more than $3,000 per year. You can contribute
25 percent of your net income up to $40,000 if you don't have an employer 401(k) or any other type
of retirement plan."
Investors who currently have IRAs can easily shift their investments
into SRI funds.
"There are no unique or special issues with regards to socially screened
funds," said Mr. Lent.
Investors who manage their own IRA money through a brokerage such
as Schwab, Fidelity, or Vanguard can purchase
SRI mutual funds for their accounts. Alternatively, investors can set up an account directly with
an SRI mutual fund company or find a broker or financial adviser for assistance.
IRAs for retirement savings makes sense financially; doing so through SRI makes additional sense
socially and environmentally.