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withdrawn.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
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