Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 5, 1995 TAG: 9506060084
SECTION: NATIONAL/INTERNATIONAL PAGE: A-1 EDITION: METRO
SOURCE: Los Angeles Times
DATELINE: WASHINGTON LENGTH: Medium
Now, in an uncustomary show of agreement, the White House, a significant portion of Congress and many economists share a strategy they hope will help alter those habits.
Their idea: to enhance the tax benefits of Individual Retirement Accounts and slash the restrictions on their use so that millions more Americans could profit from them. Then, according to this idea, many households would reform their spend-now, save-later ways and, in the process, give the nation's future prosperity a welcome boost.
``There is support for a better IRA in the Senate, in the House of Representatives and even in the White House,'' said Sen. William V. Roth Jr., R-Del. ``So it's clear that the IRA's time has come.''
The House included an expanded IRA in the tax-cut legislation it passed last month, and Roth and Sen. John Breaux, D-La., have introduced an IRA bill with broad bipartisan support in the Senate.
Some doubters continue to dismiss the proposals as yet another tax boondoggle for the affluent at a time when benefits may be tightened for those who can barely afford to save a penny. Moreover, the short-term fate of IRAs is bound up in delicate House-Senate negotiations on the budget.
Nevertheless, with the two parties tied in knots over most issues of budget policy, IRAs leap out as one of the few areas where the White House and Congress seem to be on a similar wavelength.
``Everybody wants that,'' a senior White House official said recently of a more generous, rejuvenated IRA. ``It's in the (GOP) plank. There's no argument, or at least there shouldn't be.''
IRAs now allow some taxpayers to set aside as much as $2,000 a year in tax-sheltered savings accounts. Neither annual IRA contributions nor income earned by the accounts is taxed until taxpayers make withdrawals upon retirement - a time when they are presumably in lower tax brackets than when they were working and contributing to their IRAs.
Currently, however, there are strict limits on who may benefit. Couples earning more than $50,000 or individuals earning more than $35,000 get no deduction at all. Beyond that, a 10 percent penalty awaits those who withdraw their money before reaching age 59.
New proposals circulating in Congress would allow households with higher incomes to contribute to tax-favored IRAs and to make penalty-free withdrawals before retirement. For savers who gave up the tax deduction for the annual IRA contribution, earnings would never be taxed.
All this would be a boon for savers, who would owe no taxes at all on their IRA withdrawals.
And on top of that, IRA advocates promise a benefit for all of society: As more households purchased IRAs, the rise in private savings would pay off in the form of rising living standards for all.
If this sounds too good to be true, some experts say it is. It is not clear, they say, whether IRAs actually add to national savings or merely encourage well-off taxpayers to shift money from one savings pot to another. Some also wonder how many working-class families would even know about IRAs - assuming they could scrape up the money to invest in them.
``Brokers are not going to go into the barrios and knock on people's doors,'' said William Gale, a senior fellow at the Brookings Institution. ``They're going to advertise in places that their clients are going to see.''
Under one or another of the current proposals, savers could use their IRAs not only for their retirement but also for various other big-ticket expenses: purchase of a first home, college tuition, major medical bills and income during long periods of unemployment. Grandparents might even be able to use IRAs to benefit their grandchildren.
The proposals, however, also come with a budgetary ``time bomb.''
Under the approaches favored by the White House, House Republicans and Roth-Breaux in the Senate, the new IRAs would be ``back-loaded.'' Investors could not deduct their annual IRA contributions from their taxable income; instead, the funds in the accounts would not be taxed as they grow from interest earnings, or when they are withdrawn.
This would cost the Treasury little in the first few years but plenty as time passed. The House-approved ``American Dream'' accounts would cost the government nothing in the first few years but an estimated $26 billion between 2001 and 2005, according to the Joint Committee on Taxation.
Would the economy feel a proportional benefit?
As some see it, IRAs have exerted a positive, if modest, influence on overall savings. Perhaps 25 cents out of each $1 invested in an IRA would not otherwise have been saved.
``I went into this research thinking that they don't do anything, but I've changed my mind,'' said Jonathan S. Skinner, an economist at the University of Virginia.
by CNB