THE IRA - individual retirement account - is once again in the spotlight, as many Americans salt away contributions to tax-deductible savings accounts before the April 15 income tax filing deadline. In Congress a move is under way to restore the IRA to the prominence it enjoyed during the early 1980s. The plan faces formidable opposition, including from the White House.
Until enactment of the Tax Reform Act of 1986 - which made it more difficult to qualify for a fully deductible retirement account - millions of Americans eagerly put money into IRAs. Under a fully deductible IRA, taxpayers could defer taxes until funds were withdrawn after age 59-1/2, while also taking a deduction for the contribution made in the tax year. IRA accounts soared. In 1985, over 16 million taxpayers claimed deductions for IRAs. In 1989, 6.4 million deductions were claimed.
The total value of American IRAs reached an estimated $500 billion at the end of 1990, up from $200 billion in 1985, says John Collins, an official of the Investment Company Institute (ICI), in Washington.
Since the tax reform law, fully deductible IRA contributions of up to $2,000 are allowed for individuals not covered by a pension plan, whatever their income.
For individuals with a pension plan, full deductibility is still available only if the adjusted gross income is $25,000 or less; for couples, $40,000 or less. Over the next $10,000 of income, the deduction is totally phased out, thus taking away the tax-deductibility for much of the US middle class.
Given the restrictions, many financial advisers now argue that alternative investments, such as tax-free municipal bonds and US savings bonds, provide a more advantageous long-range savings plan than IRAs.
The limitations on IRAs do not sit well with a large number of lawmakers, who see a linkage with the low US savings rate. Earlier this week, Senator Lloyd Bentsen (D) of Texas, and Senator William Roth (R) of Delaware, introduced legislation to restore full deductibility for IRAs. Close to three-fourths of the Senate supports the bill.
Under the measure, all workers, regardless of income level or pension plan participation, could take a fully tax-deductible contribution of up to $2,000 annually. Under a second option, the taxpayer could make a contribution with no tax deduction up front, but pay no taxes on interest earned when the money was withdrawn, so long as the money was held five years or longer. Finally, taxpayers could split their $2,000 contribution between these two types of accounts.
The plan would allow an early, penalty-free withdrawals, provided the funds were withdrawn to buy a first home, finance college expenses, or pay for major illness. Currently, there are stiff tax penalties on monies withdrawn before the taxpayer reaches age 59-1/2.
``We know that IRAs promote savings,'' Senator Bentsen says. ``When full deductibility ended in 1987 personal savings plunged - even though a recovery was under way. Savings rates today remain 25 percent below the levels that prevailed from 1981 to 1986.''
BENTSEN plans early hearings in the Senate Finance Committee, of which he is chairman. While the Bentsen-Roth bill appears to have a good shot at passage in the Senate, the House will be difficult. Representative Dan Rostenkowski (D) of Illinois, chairman of the House Ways and Means Committee, and an architect of the 1986 tax reform law, is opposed.
The White House has introduced a far more modest ``savings'' plan that does not provide for up-front tax deductibility. Opponents say the Bentsen-Roth bill could cost the US Treasury up to $25 billion over five years in lost revenues.
David Silver, president of the ICI, argues that the Bentsen-Roth bill provides ``important new incentives to save.'' The ICI is the main trade association for the mutual fund industry, which has been one of the primary recipients of IRA contributions. In 1989 mutual funds held 24 percent of total IRA assets; commercial banks, 21 percent; thrifts, 21 percent; life insurance companies, 10 percent; credit unions, 6 percent; and self-directed accounts, 18 percent.