JUST when Americans were getting used to individual retirement accounts and beginning to understand all the rules that go with them, Congress changed the rules. Now, some of those people will find it more difficult, if not impractical, to have an IRA, and for most people, the strategies for using IRAs have changed dramatically. First, and most important, the IRA can no longer be viewed as a short-term savings account. Both old and new tax laws call for a 10 percent penalty on withdrawals before age 59, but before this year, fully deductible contributions and higher tax brackets meant you could offset that penalty in four or five years.
Now, a taxpayer in next year's 28 percent top tax bracket who could still claim a deduction for IRA contributions would need 13 years before the IRA earned enough to offset the penalty. If he could not take the IRA deduction, it would take 19 years. If you're over the age of 59, there is no penalty, so the IRA will always do better than a regular, taxable savings account.
``If your real objective is to put money away for retirement and leave it there over the long haul, then you're silly not to have an IRA,'' says Dallas Salisbury, executive director of the Employee Benefit Research Institute. ``But if you're putting money in mainly to have it as a tax shelter, then you might think about doing something else.
``As one who lost the tax deduction, I wish I still had it,'' he adds. ``But I'll still save the same amount of money this year as I did in '86.''
The question, however, is what's the best thing to do with that money now that some of the rules have changed and interest rates are still fairly low. The choices are the same; it's just the strategies that may be different. In examining these choices, we're assuming either that people still have the deduction as an incentive to fund the IRA, or that they've decided to keep funding it despite the loss of the deduction. Banks and thrifts
These institutions still have the lion's share - over half - of IRA assets. But the big question now is whether to go long or short. Should your IRA money be in certificates of deposit that mature in 2 to 5 years, or should you keep your money on a shorter leash, by tying it up for no more than six months to a year?
If you think interest rates are going to rise in the next few years, you'll want to stay short, so you can ``trade up'' to a higher yield as rates rise. But with five-year CDs paying 9 to 10 percent at some institutions, and the six-month variety paying six percent or less, you'd have to do a lot of trading up to match the constant 9 percent yield.
One argument against going long at a bank, however, is that some banks may have their own penalties for taking out any money early. So if you need your money for an emergency, you'll not only have to pay a 10 percent penalty to the Internal Revenue Service, you might have to pay an early-withdrawal penalty to the bank. Even if you want to take your money out of a bank IRA and put it in another IRA somewhere else, like a mutual fund, you won't have to pay an early-withdrawal penalty to the government, but you might have to pay one to the bank. (You can withdraw money from an IRA without a government penalty if you put it in another IRA within 60 days.) Mutual funds
With more than 18 percent of the IRA market, mutual funds have the second-largest share. Mutual funds can cover the needs of the most conservative investor, via low-risk money-market funds, as well as those who like some risk, via funds that invest in new companies. In between, you can find funds that invest in blue-chip companies, companies that stress income over growth, and funds that simply follow the major market indexes, like the Standard & Poor's 500. With these index funds, you won't do any better than the overall market, but you won't do any worse, either.
A ``family'' of mutual funds will let you switch among different funds and investment strategies as your needs and goals change, or as you learn about more-sophisticated investments.
Unlike federally chartered banks, where deposits are insured to $100,000, most of the mutual fund choices - including money market funds - are not government guaranteed. Even ``Ginnie Mae'' funds that invest in securities issued by the Government National Mortgage Association, are not guaranteed, despite what some of the ads say. Self-directed accounts
If you like to make your own investment decisions, you can set up a self-directed account at a full-service or discount broker, or even through a bank. Here, you - perhaps with the help of a broker - decide what stocks to buy and sell within the IRA.
Unless you have other assets to ensure a secure retirement, the self-directed approach should probably be used only for part of your overall IRA money. Since some people already have $20,000 to $30,000 in their IRAs, however, they may want to take part of that and try their hand at the stock market.
While a self-directed account lets you tailor your IRA to your needs and risk tolerance, there are also some drawbacks. Chief among them is fees. A broker might charge $25 to $30 to open a self-directed account and a similar amount in annual maintenance fees. Also, there will be commissions when you buy or sell stocks, but these can be reduced by using a discount broker.
Another possible disadvantage is in the actaul investing. You should watch your broker carefully to make sure he or she isn't ``churning'' your account - buying and selling securities without your knowledge - to generate commissions. On the other hand, customers have been known to override a cautious broker's advice and make unwise trades. Municipal bonds
Since their returns are already free of federal taxes - and state taxes, too, if you buy bonds issued in your state - ``muni'' bonds are not a candidate for IRAs. But since tax reform took the IRA deduction away from upper-income individuals, many people are moving their IRA money or putting new money into municipal bonds instead. You still get tax-free compounding of interest, but you don't have to worry about early-withdrawal penalties. Muni bonds are currently yielding about 6 percent.
For a slightly lower yield but a little more flexibility, you could go into a municipal bond mutual fund. These are paying about 6.1 or 6.2 percent, but there is a possibility for more gain if the share price, or net asset value, of the fund increases. Of course, the NAV can fall, too, which would eat into your principal. Life insurance
Another non-IRA alternative can be found in the variety of life insurance choices, including whole life, universal life, variable life, and single-premium whole life.
Because the interest in these policies builds up tax-free, the life insurance companies have been pushing them as the answer for those who have lost the IRA deduction. Single-premium life has been especially touted to insurance agents' more well-to-do clients. For a one-time premium of $5,000 or more, you get a lifetime policy, and the investment portion grows faster than if it were funded with smaller annual premiums.
Universal life, variable life, and single-premium life let a policyholder move money among a variety of investment alternatives, typically a stock mutual fund, a bond fund, and a money-market fund.
If you need the life insurance anyway, policies like these make sense. But Congress knows about them, too, and there is the chance that this tax break could also be removed.
Also, with any life insurance policies, watch for front-end ``loads,'' or sales charges, hefty early-withdrawal penalties, poor-performing investments, or even the loss of your money if the insurance company gets into financial trouble. Call several companies, look for the lowest possible fees, and find a company that has no less than an A or A+ by A.M. Best's, the insurance rating firm.