New $2,000 tax incentive may help Americans save

The ads certainly look inviting: ''Retire with an extra half million . . . ,'' states one. ''Direct your own retirement fund,'' another commands.

''The tax shelter that works for working people,'' promises a third.

They are pitching individual retirement accounts (IRAs). Until now, these savings vehicles were limited to people who did not have qualified pension plans and to people working for nonprofit organizations.

But last summer's passage of the Economic Recovery Tax Act enables IRAs to be available to everyone in 1982, whether they have a pension plan or not. For the first time millions of Americans - estimates range from 60 to 90 million - will be able to reduce their taxable income by up to $2,000, place the money in a broad range of investments, and not worry about paying taxes on the earnings until they're ready to retire.

People who had never heard of things like high-yield corporate bonds, covered calls, mutual funds, and T-bills have a new reason to give themselves an education in investment.

To give Americans even more incentive to open IRAs, Congress increased the amount people can save. Up until now, the most an individual could put in one of these accounts was $1,500. The limit increased to $1,750 if a nonworking spouse was included in an account.

Starting in January, the yearly savings limits goes up to $2,000 for a working person, and $2,250 if a nonworking spouse is included.

Another change is that a worker's $2,000 IRA contribution can be up to 100 percent of his or her earned income.

This government largess will benefit more than just people saving for retirement. By one estimate, if only half the people covered by private pension plans put away just half of the maximum amount, the US capital markets will enjoy a $25 billion windfall. So the nation's banks, mutual funds, insurance companies, and brokerage houses are fighting for their share.

Some of their ads promise the help of experts who will sit down with clients and carefully explain all the ins and outs of IRA investments. Others contain high-interest come-ons of up to 20 percent yields if deposits are made before the end of the year. Of course, the extra-high interest only applies to the time that money is deposited before Dec. 31.

Still up is the air is the question of who will use the IRA accounts and how much they will be helped in their savings goal, especially when one considers what 20, 30, or 40 years of inflation could do, even to a tax-sheltered savings account (see chart). Even the experts don't agree on all of the IRA benefits.

''If you save $2,000 a year, you'll only have one year's wages in 30 years, figuring salary increases of 8 percent a year and inflation averaging 9 percent, '' said George J. Guilbault, a vice-president with Johnson & Higgins, the pension consulting firm.

But another estimate, this by the accounting firm of Touche Ross & Co., says that if both a husband and wife start putting away $2,000 a year at age 25, by the time they reach 65 the power of tax-sheltered compounding will have netted them more than $3.4 million. If both husband and wife are working, they can each set aside $2,000. If only one of the partners works, the limit is $2,250.

But how many Americans can afford to save that much?

The Carter administration had opposed expanding IRAs because, it was argued, only those in the highest tax brackets could afford to set aside $2,000 a year. Also, the loss of federal tax revenue would be too great, compared with the relatively small social benefits.

On the other hand, advocates of IRAs point out, you don't have to put in $2, 000 every year. You can put in less, depending on what you can afford, and it will still be money that would not otherwise be available for retirement.

One remaining problem for Congress to consider is whether to index the $2,000 limit to inflation.

So with all the publicity, all the ads, and all the opportunities to save, many taxpayers are sorting though the options. They are trying to find IRA investments that enjoy the dual benefits of high interest and the safety most people demand for their retirement savings.

''The great thing about IRAs is their diversity,'' says John Dirlam, a principal with Towers, Perrin, Forster & Crosby, pension consultants. ''Except for collectibles, you can put the money just about anywhere you like. . . . You can even invest in stock options and commodity futures. You may not have anything left when you retire, but you can do it.''

''I imagine people will look for places to have their IRAs the same way they would look for any place to invest their money,'' he continued.

This flexibility, pension experts agree, is part of a larger trend in the way people save for retirement. Instead of letting the employer take care of the pension fund, waiting to see what came out at 65, and combining the result with social security, a more sophisticated population is becoming increasingly aware of their financial affairs. This includes an increased interest in managing at least part of their own retirement accounts.

The recent attention paid to flexible, or ''cafeteria,'' benefit plans is seen as further indication of this trend. In these plans, a worker can choose from a variety of compensation and retirement plans. They can often make trade-offs, taking less vacation, for instance, in return for more money in their retirement accounts. While the number of employers embracing flexible plans is still small, it is expected to grow as more workers become aware of pension planning. The new IRAs are likely to help increase that awareness.The first place people should look for an IRA account, Mr. Dirlam suggests, is the employer.Before, most employers who already had pension plans could not offer IRAs. But now they can, and many are gearing up to help their workers start saving through payroll deductions. This makes it easy to save and get the dual benefits of reducing taxable income and of tax-free interest. Employers can manage the money themselves or have a bank, securities firm, or mutual fund do it. In many cases, workers are given periodic opportunities to evaluate the investments and help select a new one, if they wish.If an employer cannot be persuaded to set up a government-approved plan, employees will likely turn to their neighborhood bank or thrift institution. At many banks, people will be able to set up ''directed investment'' accounts for all or part of their IRA money. ''You can go into the bank and say, 'Here's my IRA money. I want you to buy 30 shares of Wang and 30 shares of Digital,' '' Dirlam says. ''And they will do it. Not all banks will be willing to handle direct investments, however. Some just don't have the accounting ability.''But for those that do, changes in the IRA law have brought another dimension to the financial industry. An era of greater cooperation between the banking and securities industries is expected to occur, as banks bring customers' dollars to the brokerage houses. Acting in their accustomed role of trustees, the banks can help a customer manage the IRA as part of an overall financial plan. The brokerage house will continue to provide investment expertise and research assistance.One option made more appealing is an 18-month savings certificate for retirement accounts. The Depository Institutions Deregulatory Committee, after two months of much political warfare between banks and savings institutions, voted not to impose ceilings on interest rates on these certificates for savings and loans.If the interest rate offered is high enough, it could yield a greater return than money market mutual funds and help channel savings into ailing thrift institutions. The savings industry, however, contends that the lack of a cap on interest rates will open up cutthroat competition. It wanted a rate pegged to the average yield on Treasury securities, currently running about 13 percent. The new certificates become available Dec. 1.Another business going after IRA money is the mutual fund industry. ''A no-load mutual fund may be the most effective place to put an IRA,'' says James Schwartz, a financial planner in Denver. ''As you go through life, you'll be able to pick and choose where you want your money to go.''Most mutual funds have already set up and are advertising systems to handle these deposits. At firms with a variety of mutual funds, a customer will be able to move his money from one fund to another, depending on whether he thinks bonds, stocks, or money market instruments offer the greatest current yield.The insurance industry will be the fourth major repository for IRA funds. They will be selling IRAs in the form of individual retirement annuities and endowments. Unlike a whole life insurance policy, which pays a lump sum at death, an annuity offers little more than a savings program before retirement. If the customer dies before retirement, the heirs just receive the money invested, plus any interest. An endowment gives more insurance coverage; but, for tax purposes, you cannot deduct the portion of the account that goes for insurance.Other possible investments include various real estate and individual stocks and bonds. They do not include gold coins, stamps, paintings, or old comic books.With interest rates falling, Mr. Schwartz says, ''This would be a nice time to lock in some high yields on long-term bonds.''In choosing among these options, it would be useful to find out about fees. Most banks, thrifts, and even no-load mutual funds will charge a small fee to set up an IRA. Some might charge more than others.When it liberalized the rules of the IRA game, Congress made it clear it wanted people to think of these as retirement accounts. They are not a way to save for a trip to Bermuda while letting Uncle Sam worry about paying his bills. If you take the money out before age 591/2, you pay taxes on the withdrawn amount as if it were regular, earned income, plus a penalty of 10 percent of the amount withdrawn. This penalty is suspended in cases of permanent disability.This means, says Wayne Foster, also of Towers, Perrin, that people should make sure ''they won't have to go get their IRA money for any reason before they retire.''Another wrinkle in the IRA picture is something called SEP-IRAs. SEP stands for ''simplified employee pension,'' and it's a way for employers to make contribitions to an employee's IRA. Next year, the contribution limits on these accounts are being raised high enough to give more employers reason to set up retirement accounts. Until now, the most an employer could contribute was $7,500, or 15 percent of earnings, whichever is less. In 1982, the limits become $15,000 or 15 percent of earnings.One nice thing about these contributions is that they are fully vested when made; that is, they belong irrevocably to the employee. If an employer has an SEP-IRA plan, every employee over 25 years of age and anyone who has worked at the company for any part of three of the past five years must be included.

Inflation vs. savings Monthly income needed for retirement Annual Rate In 5 In 5 In 25 of Inflation Today Years Years Years 6% $1,000 $1,338 $2,397 $4,292 8% 1,000 1,469 3,172 6,848 10% 1,000 1,611 4,177 10,385 12% 1,000 1,762 5,474 17,000 14% 1,000 1,925 7,138 26,462

What Today's $100,000 Will Be Worth Annual Rate In 5 In 5 In 25 of Inflation Today Years Years Years 6% $100,000 $74,726 $41,727 $23,300 8% 100,000 68,058 31,524 14,602 10% 100,000 62,092 23,939 9,230 12% 100,000 56,743 18,270 5,882 14% 100,000 51,937 14,010 3,779 Source: Eaton & Howard, Vance Sanders Inc.