The Return of the IRA
IF any member of the United States Senate - or Congress, for that matter - deserves the nickname "Mr. IRA," it's Sen. Lloyd Bentsen (D) of Texas. Senator Bentsen has been tireless over the years in seeking adoption of tax bills designed to encourage Americans to salt away their dollars, either through bank savings accounts or in savings through homeownership.
A tax bill with an IRA (individual retirement account) plan was passed by Congress earlier this year, but subsequently vetoed by President Bush. Now, thanks to the tall, laconic senator from Texas, Congress is on the verge of again approving a new IRA plan.
Under legislation moving through the Senate, all taxpayers could set aside up to $2,000 a year in a tax-deferred IRA.
Earned income on the IRA contribution would not be taxed until received; moreover, the taxpayer could take a deduction for the amount contributed. And the bill allows some penalty-free early withdrawals for such reasons as college tuition, medical emergencies, or first-time home-buying.
The new tax measure would upgrade and expand current IRA policy, which allows lower-income taxpayers to take a full IRA write-off. That used to be possible for most taxpayers, until enactment of the Tax Reform Act of 1986; seeking to "close loopholes," tax reform advocates tightened eligibility requirements on retirement accounts, in effect restricting the number of people who could qualify for full benefits. Many members of the middle class suddenly found that IRAs no longer made much sense for them.
It hasn't been just middle-class families that have felt the pinch. Financial institutions and mutual funds have been hurt, too, as less money flowed into tax-sheltered savings programs.
The overall US economy has also been hurt. Top Treasury officials over the years have lamented the loss of current tax collections from money sheltered in IRAs.
On the other hand, however, IRA funds are invested for the long haul, which means that the assets in such accounts can be used to finance much-needed development projects.
The Bentsen plan would offset lost tax revenues on new IRAs through a number of provisions, including assessments on securities dealers. Congress will want to make sure that it matches as much as possible lost taxes stemming from IRA contributions with new revenues.
Exactly how much new money would flow into IRAs is uncertain. Many Americans find it hard to save at all, given lackluster growth in personal income. And concerns about unemployment discourage putting away funds in accounts that are not easily tapped should an emergency arise.
Still, IRAs encourage savings. Senator Bentsen is on target. Even the White House says it generally supports the IRA provisions of the new finance measure. Washington should move swiftly to make it once again possible for all Americans, if they so wish, to invest in IRAs.