The individual retirement account used to own this time of year. But not anymore. Advertising blitzes, bonus deals and crowds at financial institutions were the rule rather than exception before the 1986 Tax Act removed full IRA deductibility for many Americans, taking the wind out of this investment's sails.
These days, Congress and the administration are puttering around with the concept of IRAs again, with several plans making the rounds. Whatever is decided about a "new" IRA, this is an excellent time to take a look at your existing IRA and also to decide whether you should contribute once again as the April 15 tax deadline approaches.IRAs must now compete with tax-exempt municipal bonds, U.S. savings bonds and annuities for the retirement-conscious investor's attention. There are company 401 plans with similar functions.
It is still important to invest for your retirement, but you must run the numbers on all the alternatives. A smart retirement strategy includes a number of different investments. An IRA could well be one of them.
Investment firms, financial institutions and insurance companies will certainly still take your IRA money, though the pitch is much more low key. They say many Americans have remained faithful, deduction or not.
"Right after tax reform, we did see a dropoff in IRA contributions, but it has picked up a bit the last couple of years because people still see their retirement years looming ahead of them," said Kathryn Hopkins, a vice president with Fidelity Investments.
Last year, Fidelity's money-market funds were gaining the bulk of money, but that shifted to bond funds as rates declined at midyear. Now the postwar trend in IRAs is decidedly toward stocks and stock funds, she said.
Investors are pulling together their scattered IRAs.
"We're seeing an enormous amount of transfers or consolidations of existing IRA money, with 60 percent of our new IRAs falling into that category," said Donald Underwood, vice president for retirement plans at Merrill Lynch & Co. "With a bigger pool of money put together, they apparently feel they can now get the investment diversification they want through a broker."
At Merrill Lynch, stocks now constitute 32 percent of new IRA purchases, mutual funds 30 percent, government and Treasury issues 12 percent and corporate bonds 10 percent. Among remaining investments, certificates of deposit account for just 8 percent.
"Our retirement assets continue to grow and now exceed $3 billion, though its worth noting that we now also have annuities which offer tax deferral benefits without any limits to the amount of contributions," said Eugene Podsiadlo, director of sales for investment products at Citibank.
This year, 90 percent of Citibank IRA contributions are in Federal Deposit Insurance Corp.-insured choices such as short-term CDs and money-market accounts. Safety-conscious zero-coupon Treasuries are popular in its self-directed brokerage-style accounts. By contrast, during the 1980s the bank's mutual fund choices had been exceedingly popular.
"Though growth figures overall for IRAs are fairly good, it appears the nation's banks have soured on this type of business," said Gail Liberman, editor of the Bank Rate Monitor, based in North Palm Beach, Fla. "They're mostly concerned with getting clients to bring all their assets into one place." Nationwide, there's been a recent shift toward longer-term CDs, she said, based on the saver's concern that interest rates will be trending lower.
Understand the basics of IRA investments if you choose it as an important part of your overall retirement strategy.
Under current rules, fully deductible IRA contributions of up to $2,000 annually are permitted for individuals who aren't covered by pension plans, regardless of income. Those who do have pension plans can still deduct their full IRA contributions if their adjusted gross income is $25,000 or less. Above that, there's a phaseout until you reach $35,000, then no deduction. For married couples, deductions begin phasing out at incomes between $40,000 and $50,000.
Money withdrawn before age 591/2 triggers a hefty 10 percent penalty. Don't forget that IRAs are tax-deferred, not tax-exempt, which means you'll have to pay taxes when money is withdrawn later.