New Roth IRAs Tie a Firecracker to the Bull’s Tail

Most people on Wall Street figured the new Roth individual retirement account would be hot. But maybe not this hot.

Major mutual fund companies say they’re opening huge numbers of Roth accounts, as well as traditional IRAs, so far this year. And predictably enough, most of the investments being chosen for these accounts are stock funds--another good reason why the U.S. market has continued to soar.

A sampling of some big fund companies’ experiences, as IRA-opening season kicks into high gear:

* Fidelity Investments said it opened 117% more IRA accounts, including traditional IRAs and Roths, in the first two months of the year compared with the same period in 1997.

Two-thirds of the new accounts were Roths, and 58% of the Roths represented new investments, while 42% were conversions from traditional IRAs, Fidelity said.

With a Roth IRA--authorized by Congress last year--eligible investors can contribute up to $2,000 a year to the account, subject to income limits. As with a traditional IRA, money in the account is sheltered from taxes as it grows. Unlike with a traditional IRA, there is no upfront tax deduction for a Roth. But whereas money in a traditional IRA is taxable when withdrawn in retirement, money in a Roth isn’t taxed when withdrawn.

Fund companies say the never-pay-taxes appeal of the Roth is spurring tremendous interest on the part of eligible Americans who are looking to boost their retirement savings--exactly what Congress was hoping for. (Exactly what Wall Street was hoping for as well.)

* Vanguard Group, the nation’s second-largest fund company after Fidelity, said it opened 80% more IRAs in the first two months of this year compared with 1997.

* At Invesco Funds in Denver, the pace of IRA account openings in recent weeks has been running at three times last year’s pace, and the total dollar amount of money committed to IRAs of both types this year is up 260% from last year, spokesman Johnathan Burnham said.

* Charles Schwab, the San Francisco-based brokerage giant that caters to do-it-yourself investors, said its IRA-opening activity also is running at about three times last year’s rate, and that since Jan. 1 (when the Roth first became available) new accounts have been split about half between Roths and traditional IRAs.

About two-thirds of the Roths are new IRAs, while one-third are conversions from existing IRAs, Schwab said. The law that created the Roths allows investors with adjusted gross income of less than $100,000 to convert traditional IRAs to Roths, but requires that taxes be paid on the IRA funds being converted. The taxes are assessed over a four-year period beginning this year.

At Fidelity, Schwab and other investment firms, the high level of new Roth accounts--as opposed to conversions from existing IRAs--indicates that a lot of fresh cash is flowing into stock mutual funds, as the funds continue to be the retirement investment of choice for many investors. It may not be the overriding force driving stock prices higher this year, but at the margin it certainly helps--and could continue to do so, as the peak season for opening IRAs now is upon us, leading up to the April 15 tax-filing deadline.

And where is the cash coming from to fund these new stock investments? Some mutual fund firms, like Invesco, say they aren’t seeing significant redemptions from their money market accounts as investors throw more money at stock funds.

That suggests the IRA money is coming from other sources--perhaps bank savings, tax refunds or year-end bonuses.

Some of the cash now flowing into stock funds in Roth IRAs probably would have entered the market anyway this year, even if the Roth didn’t exist. Still, Wall Street loves to see stock investments made via IRAs, because that money is viewed as committed for the long term and unlikely to flee if the stock market suddenly trips.

“We think the Roth has gotten people focused on the benefit of retirement investing,” said Greg Gable, a spokesman for brokerage Charles Schwab.

Wall Street’s Most-Watched: AT&T; and Motorola were the most-followed companies on Wall Street last year as measured by the number of brokerages covering them, according to Nelson Information Inc. of Port Chester, N.Y.

Both firms were followed by 62 brokerages. Next on the list: Intel and Cisco Systems, covered by 58 brokerages each.

Does having so many analysts’ eyes on these stocks necessarily make them great investments? Not in the short run. They’re well-covered because they’re huge businesses owned by a lot of investors, but that doesn’t say anything about their merits. While AT&T; was a great stock last year. Motorola was a dog.

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Tom Petruno can be contacted via e-mail at tom.petruno@latimes.com

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Most-Followed Stocks

Here the most closely tracked U.S. companies, ranked by the number of Wall Street brokerages that had analysts following them in 1997. Also shown is each company’s ranking in this survey in each of the previous three years.

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Company Firms tracking Rank in ’96 Rank in ’95 Rank in ’94 1. AT&T; 62 1 1 6 2. Motorola 62 4 13 35 3. Intel 58 6 20 22 4. Cisco Systems 58 21 90 NA 5. Banc One 57 6 3 2 6. Merck 57 14 4 3 7. Pfizer 55 19 34 12 8. 3Com 55 48 60 NA 9. Lucent Tech. 55 NA NA NA 10. Compaq 54 18 13 39 11. Time Warner 54 2 20 32

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NA: Not applicable (not included in survey that year)

Source: Nelson Information Inc.