Good Reasons Remain to Invest in, Start Tax-Saving IRAs
When you shop the market for individual retirement accounts these days, it’s easy to get nostalgic for the good old days of IRAs.
That era was the mid-1980s, when just about everybody with income from a job could make tax-deductible contributions, and financial services firms were bidding eagerly for customers.
Double-digit yields were everywhere, even on low-risk investments like certificates of deposit. Promotional come-ons often added extra money to the pot.
Today the tax angles are a lot trickier, and money-market yields have fallen to their lowest levels in a generation. The annual IRA marketing blitz at tax time is only a faint echo of what it used to be.
“This will probably be another quiet year for IRAs,” says the newsletter 100 Highest Yields, based in North Palm Beach, Fla.
“With interest rates low, bank marketers don’t foresee a lot of competition for deposits. Thus, the 10% and even 25% bonus rates that once applied to IRAs are going to stay a memory.”
But just because the gold-rush mood has dissipated doesn’t mean everybody should simply ignore the whole subject. Financial advisers say several good reasons persist to consider starting, or adding to, IRAs.
Since the tax laws were changed in 1987, tax deductions for annual IRA contributions of up to $2,000 are limited to people who aren’t covered by other retirement plans at work, and whose income doesn’t exceed specified limits.
For single taxpayers, a full deduction is available with adjusted gross income of $25,000 or less; a partial deduction from $25,000 to $35,000, and no deduction above that point.
In the case of married couples filing jointly, the full deduction stops at the $40,000 income level, with a partial deduction in the $40,000 to $50,000 range and nothing at $50,000 and above.
“Non-deductible contributions do not lower your current year’s tax bill, of course,” says the accounting firm of Arthur Andersen in a current handbook on tax strategies. “But they do allow you to take advantage of tax-deferred compounding of income until the earnings are withdrawn from the IRA.
“While the record-keeping created by non-deductible contributions can be heavy, they can help create a retirement nest egg.”
Once a saver has determined to make an IRA contribution, the problem remains of picking a good place to put the money.
Not only are the pickings slim on fixed-return vehicles like CDs, but the choices are a bit scary in stock and bond investments as well, if you listen to the many analysts predicting “corrections” for either or both of those markets.
However, the typical IRA investment by definition is a long-term commitment. Most analysts believe you can confidently hope that stock prices will be considerably higher 10 or 20 years from now than they are today, even if you are not at all sure that they will rise over the next year or two.
And yes, there still is some competition for your IRA business, at least among discount brokers and mutual fund companies.
Many of these firms have been reducing or eliminating their annual IRA account fees lately, at least for accounts of $5,000 or more.
Other marketing inducements can still be found. For example, Calvert Group Inc., manager of a family of socially conscious mutual funds, is seeking IRA accounts by offering to donate $10 of its first year’s annual $15 IRA fee to one of 22 nonprofit organizations.
The deadline for all IRA contributions, deductible or not, for the 1993 tax year is April 15, when most people’s income tax returns are due.
