The super IRA is yearning to be born


November 20, 1995|By BILL ATKINSON

THE TIRED OLD individual retirement account is going through an overhaul so drastic that savers and borrowers alike won't be able to ignore it anymore.

Congress has agreed on legislation that would create a sort of super IRA, which would allow investors to make withdrawals without paying penalties or taxes on the money. This new and improved IRA could be such a hot product that it would attract billions of dollars in retirement savings, and billions in tax revenues.

If the legislation becomes law, which could happen as early as January, consumers won't be able to escape IRA telemarketers and IRA mailers.

Executives at banks, mutual funds and brokerage firms are already drooling about the windfall in new business they'll get if the law is passed.

"What a marketing concept," said Bill DeReuter, a government relations officer with Merrill Lynch Co. in Washington. "Free of tax."

"This is big," said Steven E. Norwitz, vice president with T. Rowe Price Associates Inc. "This is such a sleeper. The public hasn't vTC caught on to it yet. Suddenly, you are going to see IRA ads all over the place."

Both the House and the Senate agreed last week on the components of the new IRA, called the American Dream IRA. The new IRA has features that make today's IRAs look as if they should have been given up for scrap years ago.

Here's why:

* It would create an IRA that lets the investor dip into money saved after only five years without being penalized or taxed. The catch -- and it's a small one -- is that the money would have to be used for a first-time home purchase, catastrophic health care, education expenses, or if an investor has received unemployment compensation for at least 12 weeks.

These wrinkles are miles ahead of current IRA rules, which not only tax the money withdrawn before age 59 1/2 , but subject it to a 10 percent penalty.

* The new IRA would increase to $4,000 the amount an individual and a spouse with one income could contribute annually, compared with $2,250 under current rules.

* It would raise the ceiling at which a couple can claim a deduction to $45,000, and $65,000, compared with $40,000 and $50,000 under current law, and it would raise the ceiling for individuals, too.

Some investors might back away from the new IRA because the money invested wouldn't be tax deductible, but the benefits could be substantial because the earnings, when withdrawn, wouldn't be taxed.

Take a couple in their 40s who invest $4,000 annually over 20 years, and get an 8 percent rate of return on their investment. When they retired and started withdrawing the money over a 25-year period, they would have total, after-tax withdrawals of $396,275.

Compare that to the current nondeductible IRA, which the new IRA would replace. After-tax withdrawals for the couple would be $307,772 -- a difference of $88,503.

It's those kinds of figures that make the experts smile.

"I think it has great potential," said Kathy Hamor, executive director of the Savings Coalition of America, a Washington-based trade group that promotes savings through IRAs.

"Anything that encourages people to save is good."

The new IRA would be a good deal for the government, too. Because contributions would be nondeductible from income taxes, the government could raise about $5 billion over the next five years.

The government would stand to make more money should investors roll over their IRAs into the new instrument.

The legislation has been the best news for IRAs since the Tax Reform Act of 1986 drained the life out of them. The act placed strict limits on who could put money into an IRA, and also it tightened up on deductions.

In 1986, people pumped $38.3 billion in IRAs, but after the act was passed, contributions plunged to $14.9 billion in 1987, and they have continued to fall. In 1993, the most recent numbers available, people put just $10.5 billion into IRAs.

What could take the steam out of the new IRA is that it's part of the budget bill, which will likely be vetoed by President Clinton.

But the president is an advocate of IRA reform, and so are Republicans and Democrats.

Executives at investment houses are betting that the sides will reach an agreement and IRA legislation will be passed.

In fact, they are so confident that they're already holding meetings to discuss advertising strategies and products they can send consumers to help them analyze how IRAs can be useful in building their retirement.

"We just hope we can get through this [budget] impasse," Mr. DeReuter said. "This is one area where they [the politicians] can all agree."

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