Taxing Days of Change for IRAs

By Barbara Rudolph

For millions of Americans, last week was the final chance to cash in on one of the greatest tax breaks of all time: the Individual Retirement Account, or IRA. Since 1982, when IRAs became available to all workers, some $320 billion has been stashed away by 28 million households in the handy, tax-deductible, tax-deferred savings vehicles. With tax reform, however, the rate at which IRA money will be saved beginning in the 1987 tax year could fall drastically. Amid the crush to use the plan for a 1986 deduction, money managers were struggling hard to educate consumers about the future, and occasionally mourning the passing of a friend. Moaned David Zaslow, a partner in the Los Angeles accounting firm of Roth Bookstein & Zaslow: "The new tax laws crippled the IRA."

Under the rules that expired on April 15, virtually all taxpayers in the 87 million U.S. households could take a deduction on their IRA contributions of up to $2,000 a year; they pay no income taxes on their investments until they retire. Now only single taxpayers earning $25,000 or less and married couples with incomes of $40,000 or less can take the full IRA deduction. (Taxpayers in any income bracket who have no pension or profit-sharing plan at their workplace can do the same.) Single people earning between $25,000 and $35,000, and married couples with incomes between $40,000 and $50,000, can take partial deductions. Income on all IRA investments will continue to accumulate tax-free.

In theory, about 90% of U.S. taxpayers remain eligible for the full IRA deduction next year. The evidence suggests, however, that they are less likely to use the savings device. In putting together last year's tax package, the Senate Finance Committee discovered that in 1984, less than 8% of all households with incomes under $30,000 -- a group representing 76% of U.S. taxpayers -- made IRA contributions. At the same time, 59% of all households with incomes above $50,000 invested in IRAs.

For banks, mutual funds and other institutions that manage IRAs, the challenge last week was to tell customers the difference between the new and old rules -- and to promote new clients. Fidelity Investments, an $80 billion Boston-based mutual-fund group, gave its round-the-clock crew of telephone operators special training in how to explain the new tax code to would-be investors. Citibank (1986 revenues: $144.8 billion) programmed computer terminals in 200 branches to answer questions about IRAs and responded to thousands of queries.

Financial advisers are divided about whether a postreform IRA makes sense for people who can no longer claim the full $2,000 deduction. Some money managers point out that the same limited tax break can easily be found in a tax-exempt municipal bond. Unlike the IRA, it imposes no penalties for early withdrawal. But some workers, at least, are still happy with the prospect of a stripped-down IRA. Richard Brody, 57, a New York City-based department-store buyer, plans to contribute to his retirement account next year even though he will be entitled to no tax deduction. On the other hand, John Sullivan, 42, an executive at Marine Terminals in San Francisco, has been making the maximum IRA contribution for the past three years, but will no longer do so. Says Sullivan: "I'm going to put the money into speculative stocks."

With reporting by Jay Branegan/Washington and Christine Gorman/New York