Individual Retirement Accounts, scorned by investors since their tax-cutting powers were limited in 1986, apparently are enjoying a modest revival.
New deposits to IRAs have been on the rise at several major brokerages and mutual funds in recent months, fueling speculation that the tax-advantaged accounts might rebound even without proposed changes in IRA rules.
The IRA had a five-year reign as small savers' favorite tax shelter until 1986, when tax-code changes virtually eliminated it. Since then, financial institutions have slashed their IRA marketing and savers have stayed away in droves.
But since October, brokerages and funds, as well as some banking institutions, have noticed a surprising upturn in IRA business.
For example, Scudder Funds in New York reports that average new contributions in the fourth quarter last year were 36 percent higher than in the entire first nine months of the year. January business was up 110 percent from January 1991.
At Fidelity Investments of Boston, contributions were up 50 percent in recent months. And brokerage accounts at places from New York-based Shearson Lehman Brothers to Beverly Hills, Calif.-based Great Western Bank are also up significantly.
"The recession has made people hunker down and plan for rainy days," said Bill Benintende, spokesman for the John Hancock Funds in Boston. There is "a greater realization that conspicuous consumption detracts from the ability to control one's financial destiny," he said.
Financial experts have no firm handle on what is driving this surge of interest in IRAs. It is a product many assumed was being used only by overly conscientious savers. IRA contributions, which hit $38 billion in 1986, fell to $11 billion for tax year 1990, the IRA Reporter newsletter estimates.
The IRA has suffered from both public misconceptions (it's actually deductible against current-year taxes for many savers) and competition (company-sponsored retirement savings plans such as 401(k)s offer more benefits.)
Still, financial experts say the IRA is one of the few investments that offers both flexibility and shelter from taxes on interest income or trading profits.
Low interest rates are spurring much of the IRA activity, observers say. In some cases, they are moving savers from banks or savings and loans into higher-yielding but riskier venues such as bonds or stocks.
But not all the IRA action is in transfers from savings accounts into funds or stocks, officials report. New contributions are larger at some institutions, and are coming in earlier in the "IRA season" -- the months up to the April 15 tax-filing deadline. Contributions must be made by April 15 to qualify for the previous tax year's returns.
The earlier the contribution is made, the more tax benefit is obtained.
An early-bird saver who makes annual $2,000 contributions on Jan. 1, compared with one who makes it April 15, would have $10,010 more after 25 years assuming an 8 percent annual return, according to an estimate by Vanguard Funds of Valley Forge, Pa.
One item also fueling the IRA rush is a heated and prolonged stock market rally that has captured the small investor's attention. And with interest rates on savings accounts at 20-year lows, this makes risk-taking in a nest egg -- which many savers feel should be immune to risk -- look attractive.
Low rates, some experts suggest, might also be planting seeds for general interest in long-term investing. Concern grows among the aging baby boom population that retirement savings are vital, especially in an age when the future of both corporate and government retirement benefits is in question.
Based on past returns, experts often argue that the stock market is the best place for retirement money. But unusually high short-terms rates in the 1980s, plus volatile stock markets, made that pitch hard to sell.