When Pension Money Is at Stake, Try an IRA

THEY were started in the 1970s, slapped with restrictions in the '80s, but are still growing strong today. Individual retirement accounts (IRAs) remain a top choice of people looking for a safe, often tax-deferred spot for their money. They are also perfect for Americans who lose jobs from corporate downsizing or change jobs and need a place to put their pension dollars.

Even if people do not qualify for all the advantages of an IRA - such as gaining an immediate tax deduction for the amount of their contribution - they can still defer paying taxes on their cumulative interest and dividend earnings until earnings are withdrawn. That can be years later.

''IRAs remain a very good investment for individuals looking for the safety of their retirement income or who want greater control over their retirement dollars,'' says Cindy Hounsell, director of the women's pension program for the Pension Rights Center, a public advocacy group in Washington.

Today, IRAs continue to post steady asset gains, with the total value of IRA plans now exceeding $1 trillion. This growth is occurring despite legislative changes in 1986 that took away the tax deduction on IRAs for most middle-class Americans. Congress was worried that Americans were removing billions of dollars from tax rolls through IRAs.

Originally created by Congress in 1974, IRAs were designed to be a retirement-income vehicle for wage-earners. A person opening an IRA could contribute up to $2,000 annually, thus reducing the gross income for that tax year, while also deferring taxes on interest and dividend earnings until he or she actually withdrew their retirement dollars. In most cases, the withdrawals would come after retirement, or, at the earliest, after the person reached age 59-1/2. That is still the case today.

But as a result of the Tax Reform Act of 1986, contributions into IRA plans fell from $38 billion in new money in 1986, to $15 billion in 1987, notes Katherine Rabon-Summers, director of industry studies for the Investment Company Institute, a mutual-fund trade group in Washington. In recent years, the level has been around $10 billion annually.

In the late '80s, however, the losses were offset when more and more Americans booted out of jobs during corporate downsizing began taking lump-sum pension distributions, such as from defined-contribution plans - including 401(k)s - and putting them into IRAs.

Moreover, scores of departing workers, concerned about the safety of their pension plans - which could be lost because of corporate bankruptcies - or who just want greater control over their pension dollars, also began shifting retirement assets to IRAs. Thus, much of the new money going into IRAs is ''rollover'' money from existing benefits plans.

Currently, to qualify for a tax-deductible IRA, as a general rule you cannot be an active participant in a pension plan. The spouse of a person in such a plan also cannot invest in a tax-deductible IRA, even if the spouse has no pension plan.

There are exceptions: Single individuals who earn less than $25,000 annually, or married couples who earn up to $40,000 annually, may be able to fund a tax-deductible IRA, even if they are in a pension plan. The deduction is fully phased out at $35,000 for individuals, and $50,000 for married couples. Check with your employer and the provider of an IRA to see if you qualify.

But studies have shown that a nondeductible IRA will still build a hefty income over time, through a combination of compounding, tax-deferral on earned interest, and annual contributions. You can contribute up to $2,000 annually ($2,250 for married couples with one working spouse).

Pension plans that are defined-contribution plans, such as 401(k) plans, where the individual voluntarily kicks in retirement dollars, are in effect ''trust'' accounts, Ms. Rabon-Summers says. That is, the company has set up an individual trust ledger for the worker. The retirement dollars are usually considered safe. Most plans allow a worker leaving a firm to take their money with them and tuck it into an IRA.

Some defined-benefit plans, that is, regular pension plans, will also sometimes allow retirement dollars to be withdrawn and put into an IRA. Check with your company. For a free booklet, ''What You Should Know About the Pension Law,'' write to PWBA, US Dept. of Labor, 200 Constitution Ave., N.W., Washington, DC, 20210.

One potential disadvantage: Creditors, or others, such as an ex-spouse, might be able to gain quicker access to your funds if they are in an IRA instead of the corporate benefits package.

If you do roll over funds, most experts say that they should be kept in a separate IRA, not intermingled with an existing IRA account. In other words, roll over only pension money that is taxable when benefits are withdrawn. Don't mix it with an IRA that includes ''after-tax'' dollars. Also, you can tap into an IRA account at any time in case of financial need. You must pay a penalty for early withdrawal, plus a tax on the amount of earned-interest withdrawn.