Wild About Iras

By Stephen Koepp

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Exclamation points and toll-free telephone numbers were sprouting last week like the most impatient blossoms of spring. Banks, brokerages and other financial organizations sprinkled them across their newspaper ads, pasted them up in their windows and posted them on billboards. In an extravaganza that gets noisier every year, the institutions were making their last-minute pitches to lure millions of consumers who were shopping for investment vehicles for their individual retirement accounts.

By next week's April 15 deadline, U.S. taxpayers will have made an estimated $41 billion in IRA deposits for 1985, an increase of 14% over last year. Most consumers waited until the last few weeks before the tax deadline, even though they could legally have made last year's contributions anytime after Jan. 1, 1985. "This is the absolute peak of IRA mania right now," declares Brian Smith, senior vice president of the U.S. League of Savings Institutions.

The IRA has unexpectedly become the most important new financial investment vehicle in decades. By giving consumers an incentive to save and invest, the IRA tax deferral has provided a huge influx of new business for banks, thrift institutions and Wall Street brokerage houses. The total amount put into IRAs as of April 15 will be about $240 billion; by 1990 that total is expected to reach $500 billion. Those figures include Keogh plans, an equivalent of the IRA designed for self-employed individuals.

This gargantuan nest egg has also created greater financial security for the citizens who take part in the program. More than 27 million households, or about one-third of the U.S. total, have started at least one IRA. George Solomon and Anne Wyndham, a pair of Santa Monica, Calif., actors with a two- year-old son, each plan to start an IRA because of their uncertain future income in show business. Says Silverio Califano, 42, an Eastern Airlines aircraft inspector in Miami, who contributes to his account every year: "As far as I'm concerned, I think IRAs are the greatest thing."

The IRA flood started as a trickle in 1974, when the Government began permitting them for taxpayers who did not belong to a pension plan where they worked. But the flow of money into the accounts became a torrent in 1982, after Congress extended the program to virtually everyone. Under the current rules, working taxpayers may put as much as $2,000 a year into an IRA and deduct the contribution from gross income when filing their federal tax return. For those in the 50% bracket, it means an immediate saving of $1,000 in taxes for their $2,000 contribution. Savers must eventually pay taxes on the investment, but by the time they reach retirement age, their income is likely to decline and put them in a lower bracket.

Besides enjoying the tax deferral, IRA savers can watch their investment compound over the years. If a 30-year-old worker makes a $2,000 annual contribution for 30 years to an IRA earning an average of 10%, the account will balloon to $468,580. Those who withdraw their money before age 59 1/2, however, must pay taxes on the amount taken out, as well as a 10% penalty, which can make IRAs an unwise investment for consumers who think they will need the cash on hand.

During the early 1980s, most IRA money poured into banks and savings and loan associations because interest rates were going into outer space. But one- year certificates of deposit, which earned a handsome 15% or more in 1981, now bring savers only 8% or so. Result: many consumers, suffering from single- digit shock, have started moving their IRA accounts to Wall Street in search of better yields. IRAs invested in stocks typically earned a 26% return last year. "We're clobbering the banks. It looks like the tables have turned," boasts Gary Strum, first vice president in charge of pension services for E.F. Hutton. Thrift institutions in particular have suffered a drain. Their share of IRAs has fallen from 54% in 1982 to 28% today.

The surge of IRA money into stocks has become a self-perpetuating trend by helping keep the bull market going. Last week the Dow Jones industrial average closed at a record 1821.72, up 53.16 points for the week.

The banks and thrifts have launched a strenuous effort to keep the brokers from hijacking their customers. Many have teamed up with investment firms so they too can offer stock packages. More visibly, financial institutions are showering consumers with promotional giveaways and extending hours. Customers who open an IRA at North Carolina Federal Savings and Loan in Charlotte automatically enter a drawing for a free round-trip Piedmont Airlines ticket, which can be used on any of the routes the carrier flies, from Miami to San Francisco. New York City's Dollar Dry Dock Savings Bank is offering new IRA depositors an immediate cash bonus of up to $30. The First National Bank of Chicago has set up an IRA center that will be open on the Saturday before the deadline and until midnight on April 15. To handle the rush, senior executives will be tapped to wait on customers.

If consumers lack the cash to start an IRA, some banks will lend it to them. Borrowing money to put in the bank sounds paradoxical, yet it makes sense for some people because the interest on the loan is tax deductible. New York City's Chemical Bank, which urges customers to think about an IRA "even if you don't have the money," calculates that a taxpayer in the 35% bracket would pay about $154 in interest on a $2,000 one-year loan but could recover $54 of that by deducting the payment on an itemized federal income tax return. Meanwhile, the customer's IRA, invested at about 9%, will have earned $183.

Many people who were novice investors when they first started an IRA have become armchair financiers. Instead of consolidating their contributions in one safe place, many IRA holders shuttle their accounts from one investment to another as the economic winds change. Says Alfred Johnson, chief economist for the Investment Company Institute: "They no longer view IRAs as passive accounts that gather dust until retirement. IRAs have become aggressive investment tools. Consumers invest in them because they want to get rich." The fastest-growing new account is the self-directed variety, in which the customer can switch from, say, Treasury bonds to a real estate investment trust. Citibank offers an account called Direct Access that enables investors to monitor their IRAs on home computers.

The welter of offerings can leave many consumers befuddled. IRA ads often bristle with hype or technical jargon. Says Donald Underwood, vice president of retirement planning at Merrill Lynch, which holds 1.4 million IRAs: "Consumers are overwhelmed by the variety because there's a lot of smoke out there. They have to do their homework."

While IRAs have hit it big with consumers, it is less clear whether they have accomplished their broader goals. One of those purposes was to boost the U.S. savings rate, which would make more capital available for expanding the country's industrial base. Yet consumers saved only 4.6% of their disposable personal income in 1985, compared with 7.5% in 1981, the year before IRAs were expanded. Economists have not despaired, though. "On balance, the IRAs have worked well. Maybe the savings rate would have dropped even more without them," says Robert Ortner, chief economist at the Commerce Department. Experts generally believe that most initial IRA contributions consisted of money that consumers had already saved anyway. But after that cash is tucked away, the IRA program is expected eventually to stimulate more and more new savings.

The other primary goal for the IRA law was to encourage citizens to supplement Social Security with their own portable pensions. While huge amounts of cash have indeed been moved into such accounts, the IRA program is expected to cost the Government about $13 billion in lost tax revenue this year. Moreover, some critics point out that the taxpayers who most often take advantage of IRAs are the ones who need it least: the middle and upper class. Low-income citizens seldom have the spare cash to invest. To the extent that the IRA program takes pressure off legislators to bolster Social Security payments, it may work against the interests of low-income citizens in the decades ahead.

IRA-tending consumers will want to keep an eye on Washington for possible changes in the rules. President Reagan has proposed increasing the top IRA contribution for nonworking spouses from $250 to the $2,000 that is currently allowed for working people. Many legislators oppose that idea, because they believe it would benefit mostly the wealthy. In another development, the House passed a tax-reform bill last November that included a provision to discourage early IRA withdrawals by increasing the penalty from 10% to 15%. That measure could stand a chance, since the Senate Finance Committee is considering the same step.

Despite potential adjustments in the law, the IRA momentum is unlikely to diminish in the near future. With a certain amount of wonder, Economist Johnson of the Investment Company Institute declares that "many consumers are saving for an IRA contribution by forgoing weekend movies or a spring vacation or that brand-new suit." U.S. consumers, usually noted for their spending, now appear to have saving on their minds, at least until April 15.

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With reporting by Jay Branegan/Washington and Thomas McCarroll/ New York