Everyman's Tax Shelter

By Charles Alexander

Expanding the I.R.A.s sets off a savings free-for-all

On Jan. 1, the opening bell rings for what promises to be one of the most competitive struggles in financial history. The tax bill that Congress passed this year made some 50 million more Americans eligible for tax-sheltered Individual Retirement Accounts. Sensing a bonanza, bankers, as well as brokers, mutual funds and insurance companies, have unleashed a barrage of full-page newspaper ads and direct-mail come-ons aimed at attracting new I.R.A. investors. Says Len Deininger, manager of the group pension department at Prudential Insurance Co.: "I have never seen anything like this before. The competition is really getting fierce."

Created by Congress in 1974, I.R.A.s allow wage earners to put aside a portion of their income into special accounts, where the money earns interest tax-free until it is withdrawn during retirement years. At that time, in most cases, a person's income, and thus his tax bracket, has gone down. Besides regular bank deposits, the I.R.A. money can be invested in stocks, bonds and a host of other ventures.

Until now, only people not covered by company pension plans were eligible. But beginning next month, virtually every worker will be able to open a tax-sheltered account. Moreover, Congress has boosted the maximum annual individual contribution to an I.R.A. from $1,500 to $2,000.

The expanded program is expected to draw in at least $20 billion annually, and so financial institutions are pitching I.R.A.s with all the enthusiasm of oldtime snake-oil salesmen. Many advertisements promise investors that if they start saving now, they can be millionaires in their golden years. An ad run by Chase Manhattan Bank, for example, points out that a couple saving $4,000 annually will pile up $1.3 million after 30 years, if the interest rate stays at a 12% level.

Other promotions play upon fears that the Social Security system will go bankrupt. Long Island Trust, a commercial bank in New York, produced a newspaper ad showing a hand holding a Social Security check for $235.59. Across the face of the check is stamped: "Insufficient Funds." Reads the caption: "Will Social Security retire before you do?"

The best selling point in addition to the tax-free status, though, is high interest rates. Federal bank regulators decided last month to let financial institutions pay whatever interest rates they want on I.R.A accounts. The yield on virtually every other kind of savings deposit is still subject to strict ceilings. Passbook accounts, for instance, can pay no more than 5.5%.

Most banks and savings and loan associations are not yet saying precisely what the return will be on their I.R.A.s when the new program begins next month. They are waiting to see what happens to the general level of interest rates in the economy. But some institutions are offering hefty short-term bonuses to entice customers to sign up ahead of time. In Los Angeles, Republic Federal Savings will pay interest at an annual rate of 20% for the rest of the year to savers who open accounts early. The deposits do not become tax-free I.R.A.s, however, until January. A similar deal at First Federal of Chicago, which offered an annual rate of 16% interest in December, attracted 506 deposits totaling some $800,000 within four days.

Banks and S and Ls currently hold more than two-thirds of all I.R.A. deposits. They hope to maintain their dominance of the market by stressing the safety of their accounts, which are insured up to $100,000 by the Federal Government Says Ronald Johanson, first vice president of Boston's Home Owners Federal Savings: "Ultimately, people want protection. That's the grabber."

More venturesome investors will have a wealth of other options. Mutual fund companies are aggressively selling an I.R.A. smorgasbord consisting of various kinds of stocks, bonds and money-market securities. Fidelity Management Group, for example, has eleven such funds. For an annual fee of $10, Fidelity customers can switch their money between these funds as changing economic conditions cause the stock market and interest rates to gyrate. Big brokerage houses like Merrill Lynch offer I.R.A. investments including partnerships in real estate deals and special accounts that allow investors to pick their own securities and trade them with unlimited frequency.

Insurance firms hope to capture a big share of the I.R.A. pie by focusing on lucrative group plans for companies interested in helping their employees save for retirement. Under such arrangements, workers can have a set sum deducted regularly from their paychecks and invested in an I.R.A. administered by the insurance company. Connecticut General Life Insurance Co. has already recruited the employees at 500 firms, including NCR.

The hype now swirling around the I.R.A.s is almost a replay of the fanfare that marked the introduction of the tax-free All Savers Certificates last October. That gimmick proved to be much less popular than anticipated, but financial analysts do not expect the same fate to befall the new I.R.A.s. To begin with, the All Savers Certificates are available only in the form of deposits at banks, S and Ls and credit unions. Moreover, the All Savers program was designed as a temporary measure to aid the ailing financial industry and is due to expire at the end of 1982.

In contrast, the expansion of I.R.A. eligibility is a permanent step likely to be a powerful incentive for saving. Says Treasury Secretary Donald Regan: "I think the I.R.A. device will do more to stimulate savings than anything else we've got in the tax package." Some economists estimate that the I.R.A.s will lift the personal savings rate from its low average level of 5.5% in the past five years to 8% by 1984. If that happens, the U.S. will have a swifter flow of funds to finance the capital investment it needs to restore robust economic growth. --By Charles Alexander. Reported by Bernard Baumohl/New York and David Beckwith/Washington

With reporting by Bernard Baumohl/New York, David Beckwith/Washington

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