In the Chinese calendar, 1982 may be the Year of the Dog; but in the investment industry it has to be the year of the Individual Retirement Account (IRA).
The Credit Union National Association -- principal trade group of federal credit unions -- estimated recently that by the end of the 1982 eligibility period (April 15, 1983), more than a million credit union members will have opened IRAs and put a total of around $1.8 billion in their accounts.
And according to the Investment Company Institute -- the trade association for the mutual fund industry -- between Jan. 1 and June 30 of this year the number of IRAs with its member companies rose from 500,000 to 1.5 million. The dollar value of those accounts grew from $2.6 billion to $4.3 billion.
Add to those two sets of figures the number of account holders and the dollar value of all the IRAs at banks and S&Ls and in insurance annuity programs, various limited partnerships such as real estate and oil ventures, employer-sponsored plans and self-directed accounts at brokerage houses, and you get some appreciation for the impact of the new IRA rules on national savings patterns.
Those rules have been explained often this year, but let's review the basics once more:
An Individual Retirement Account is a tax-deferred retirement savings plan which may be opened by anyone with earned income from employment. Salary, wages, tips, commissions and net earnings from self-employment all qualify; retirement pay, dividends and interest do not.
You may have an IRA in addition to any other retirement program in which you participate, including a company-sponsored pension plan, a tax-sheltered annuity if you're employed by an educational or religious organization or a Keogh plan if you're self-employed.
Up to -- but not more than -- 100 percent of your earned income may be deposited in an IRA, subject to an annual ceiling of $2,000. If you're married and your spouse is neither self-employed nor a wage earner, the ceiling goes up to $2,250, deposited in two separate accounts but split any way you like (except that no more than $2,000 per year may go into the account of either spouse).
IRA money may go into any of the places mentioned above (and into more than one at the same time, if you like), but may not be invested in "hard assets" such as stamps or coins, gems or precious metals and works of art or antiques. It also may not be placed in life insurance policies.
Except in case of death or disability, money in an IRA is hit with a tax penalty of 10 percent if withdrawn before the investor reaches age 59 1/2. Withdrawals must start by the time the plan owner reaches 70 1/2.
Dollars deposited in an IRA are deducted from gross income on federal income tax returns, thus providing an immediate tax saving; and investment earnings accumulating in an IRA are not taxed. When you start to withdraw from the account, all money withdrawn is then taxed as ordinary income.
Presumably, by that time you will have retired and moved to a lower tax bracket. In any event, annual deposits and accumulating earnings grow without any immediate tax bite -- in effect, giving you an interest-free loan until the funds are withdrawn.
Where is the best place to put IRA money? It depends on the individual -- as is so often the case in money matters. The investment vehicles available range from ultra-conservative to highly speculative.
Approval of a particular program by the Internal Revenue Service means only that the specifics of the program meet the technical IRA rules and does not imply any kind of warranty or guarantee of the program, its sponsors or the underlying investments. You're on your own, so examine the various options carefully.
Take your own personal circumstances into consideration when selecting an IRA vehicle. For instance, if you're depending on the IRA to provide a large part of your retirement income, you should be more conservative than if you can also count on a generous pension payment from your job or have substantial investments already.
Is an IRA for everyone? As good as the program sounds -- and it really is that good for most people -- it isn't right for all.
You shouldn't put into an IRA money that you may need in a few years, perhaps for a child's college education or to buy a house. Unless you've reached age 59 1/2, you'll have to pay a 10 percent tax penalty on the withdrawal, in addition to the ordinary income tax that everyone pays.
If you're a teacher or work for a nonprofit organization such as a church or charitable foundation, you may qualify for a tax-sheltered annuity (TSA). A TSA may offer a better deal than an IRA; and there is no penalty for early withdrawal.
Look into any corporate plan available where you work. Although a payment into a company plan uses after-tax dollars, your employer may add 50 cents to your account for every dollar you put in. Company matching funds are not currently taxable, and that extra bonus may more than make up for the lost tax break on your own deposits.
If you're self-employed, a Keogh plan permits larger annual contributions with the same tax benefits. And when Keogh money is withdrawn, it may be eligible for a very attractive tax treatment using 10-year forward averaging -- a tax-saving technique not available for IRA withdrawals.
But there are disadvantages to each of these alternatives, too. TSAs usually offer a very limited choice of investment vehicles. You may have to stay with a company as long as 10 years to be vested (that is, to have an absolute right to the funds) in a company plan. And if you have employes in your own company, you may have to include them in any Keogh plan you set up.
Remember, too, that you can participate in a TSA, an employer-sponsored retirement plan or a Keogh and still be eligible for an IRA.
What's the bottom line? An Individual Retirement Account is not for everyone, but it does make good financial sense for most people. An IRA offers a pretty substantial tax incentive to do what you know you should be doing anyway--saving some of today's dollars for tomorrow's retirement.