Winds of change in retirement plans

There may soon be good news for hundreds of thousands of Americans having their own IRA or Keogh personal retirement plan -- as well as thousands more who would like to begin one.

Congress now appears to be leaning toward a significant revision of the individual retirement account (IRA) and Keogh pension plan concept. The changes , assuming they come, are expected to be part of any major tax cut revision later this year, or more likely, early in 1981.

Both the influential tax-writing House Ways and Means Committee and the Senate Finance Committee will be taking a close look at private pension plans during hearings this week. Moreover, sources indicate that there is now strong bipartisan support within both committees (as well as both chambers of Congress) for liberalizing requirements for IRAs and Keoghs.

Revisions being discussed could add up the most sweeping alterations in individual retirement accounts since the mid-1970s. Hundreds of thousands of workers now unable to take out IRAs because of participation in corporate pension plans might be allowed to jump aboard the IRA bandwagon.

Moreover, there is strong support for lifting contribution limits on both plans, now set at $1,500 for IRAs and $7,500 for Keoghs.

Keogh plans (which began in 1963) are tax-saving retirement accounts for self-employed professional people.

The main attention in Congress is on IRA's, which were designed for working persons employed by others.

IRAs -- first set up back in 1974 -- were authorized by the Employee Retirement Income Security Act. Under the IRA concept, individuals not covered in a "qualified" private pension plan at their place of employment can invest 15 percent of their annual income up to $1,500 in an IRA.

The contribution is tax deductible, and taxes on interest earnings are deferred until withdrawn. That is usually upon retirement.

Under a "spousal" IRA, where the spouse has no earned income, the couple can set aside up to $1,750.

The main drawback of IRAs, however, is that even if workers are covered by a company plan for only a short period of time, during that time they cannot contribute to an IRA.

Again, even if the company plan is financially modest, with little benefit in the long run, the employee is still prohibited from participating in an IRA.

"That's the main criticism about IRAs that we're now getting from all over the US," an official of the Senate Finance Committee argues. "There's a real question of fairness involved here, since the people that most need adequate retirement income -- working people -- are too often saddled with limited private pension plans. Yet, they can't set up their own plan, even if they have the extra earnings to do so."

According to Senate Finance Committee sources, it is now assumed that an IRA liberalization law will make it through Congress by next spring.

The reasons are twofold. There are strong pressures from thrift institutions and life insurance companies (which have been heavily lobbying Congress for changes in existing pension plan laws). There is also the matter of the presidential election campaign.

"This is a natural legislative program where a lawmaker can be for programs to boost capital investment and at the same time seek tax relief for the middle class and small saver," says an aide with the House Ways and Means Committee.

Al Ullman, chairman of the Ways and Means Committee, is proposing raising deductible limits allowed on IRAs. His suport is considered particularly crucial.

Meantime, some outside investment groups here are working hard to change the "usages" of IRAs. Funds put in such an account are now considered "locked in" until age 59 1/2, when they can be withdrawn for "retirement purposes." But until that age, any withdrawal must be offset by a severe tax penalty, amounting to 10 percent of the total taken out of the account.

The Investment Company Institute, the main trade arm for the US mutual fund industry, is seeking to modify that rule to allow withdrawals without a tax penalty for the purchase of a first-time home, or payment for college education, or vocational training for children.

According to David Silver, president of the institute, the tax penalty provides "little revenue" for the Treasury. Expanding the usages of IRAs, he argues, would greatly "stimulate" their popularity with low- and middle-income families.

Legislation to allow home purchases and education expenditures has been introduced in both chambers of Congress.

The US Treasury continues to oppose any major boost in the deductible ceilings for IRAs and Keoghs. It argues that such an expansion would mean additional losses of tax revenue and enlarge the budget deficit.

Whether the Treasury will be able to prevail with its views, however -- given the increasing desire of many lawmakers to expand pension plan benefits to more low and moderate American taxpayers -- is considered questionable.

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