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This Might Become the Year of the IRA : Investing: Legislation is introduced in Congress to revive interest in the tax-deferral retirement accounts and boost the U.S. savings rate.

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ASSOCIATED PRESS

A decade ago, you couldn’t turn the pages of a newspaper without seeing ads for Individual Retirement Accounts during tax season.

Smiling retirees were pictured strolling on beaches, relaxing at vacation homes, enjoying the grandkids--thanks to their chubby IRA nest eggs.

IRAs remain a worthwhile way to save for retirement, although few financial institutions have actively promoted them since tax-law reforms nine years ago placed rigid restrictions on their deductibility.

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That could change if Congress enacts yet another IRA overhaul, one that appears likely to widen the deductibility parameters and create additional incentives for individuals to save more.

Some financial observers think 1995 could be the year of the IRA.

“Of course you can’t predict what Congress will do . . . (but) I’m an optimist. I’m hopeful this will happen this year,” said Dennis Bertrum, director of client advisory services for Prudential Securities Inc.

“This one, I think, is almost a no-brainer,” said Stuart Kessler, a New York-based financial planner.

Industry groups like the Investment Co. Institute, American Bankers Assn. and the National Assn. of Realtors--whose members stand to benefit from relaxed IRA rules--have been actively lobbying for legislative changes to revive interest in IRAs, which were created by Congress in 1974 and have undergone three major changes since.

About two dozen IRA and IRA-related bills have been introduced in the current Congress to date--more than double a year ago--and more proposals are being tossed around, said Julie Heim, who tracks legislative issues for the monthly industry newsletter IRA Reporter.

“Last year the focus was on health care, so everything else got buried,” she said. “Now they’re focusing more on the American savings rate.”

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Some experts place a direct correlation between the steady decline in the U.S. savings rate and the latest onset of IRA restrictions. In the early ‘80s, when IRA contributions were fully deductible for all wage earners, the average after-tax savings rate per household was 8%; today it’s 4%, according to the Congressional Budget Office.

“Americans need to save more. (Company) pensions and retirement plans have been reduced dramatically. Social Security won’t be enough for most people to live on,” said Kessler.

He and other investment advisers recommend most working people make the maximum $2,000 annual contribution to their IRAs even though they may not be tax deductible, noting that income from the accounts remains tax deferred for everyone.

But few people bother.

“There’s substantial confusion and misunderstanding about IRAs--what’s eligible, what the requirements are. That turns people off,” said Steve Farkas, author of a recent retirement study put out by the think-tank group Public Agenda.

In the Public Agenda study, 82% of individuals surveyed favored a standard plan that would let all Americans save 10% of their total income in IRAs, something like the tax-deferred 401(k) savings plans many employers sponsor.

“Our clients are very confused and because of that may be suffer from analysis paralysis, so they may not fund (an IRA) at all,” said Prudential’s Bertrum.

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Unlike most other financial institutions, though, Prudential managed to revive some interest in IRAs when it decided a year ago to waive the annual account maintenance fee for customers who make the maximum annual contributions. Bertrum said there was a 32% increase in contributions among existing accounts in 1994 over 1993, and that contributions this year are running about 20% higher than last year.

But on the whole the trend has been down. Annual IRA contributions plunged to an estimated $10.5 billion in 1993 from a high of $38.3 billion in 1986, according to figures from the Internal Revenue Service and IRA Reporter.

The 1986 Tax Reform Act eliminated IRAs’ full tax deductibility, except for workers without employer pensions or families with annual incomes of less than $40,000 and individuals with annual incomes of less than $25,000. Partial tax deductions are available for families earning as much as $50,000 and individuals earning as much as $35,000.

Members of Congress and President Clinton have introduced measures to get more households interested in IRAs and to make the money they stash away more available to them penalty-free even before retirement.

The Investment Co. Institute, the mutual fund industry’s trade group, says three proposals stand out, all of which are in early stages of debate:

* The “American Dream Savings Account,” part of the House Republicans’ “contract with America,” would maintain current tax-deduction restrictions for income but give eligible individuals the option of skipping the up-front deductions and making tax-free withdrawals after age 59 1/2. Early withdrawals would be permitted without tax or penalty to pay for college, buy a first home and for catastrophic medical expenses.

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* The White House “middle-class bill of rights” would expand the income threshold for full IRA deductions to $50,000 for individuals and $80,000 for families and allow tax- and penalty-free early withdrawals for college, first-time home buying, major medical expenses and long-term unemployment. It also allows for so-called back-end deductions after five years.

* The Senate’s Roth-Breaux “super IRA,” introduced by Sens. Bill Roth, R-Del., and John Breaux, D-La., would restore full IRA deductibility to everyone regardless of income and allow for the same kind of penalty-free early withdrawals as the other two proposals. As in the President’s plan, individuals could opt for back-end deductions and make tax-free withdrawals after five years instead of waiting to age 59 1/2.

“What will likely happen is that we’ll end up with a combination of all three,” said Gene Grabowski, an ICI spokesman.

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