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Exclamation points and toll-free telephone numbers were sprouting last week like the most impatient blossoms of spring. Banks, brokerages and other financial organizations sprinkled them across their newspaper ads, pasted them up in their windows and posted them on billboards. In an extravaganza that gets noisier every year, the institutions were making their last-minute pitches to lure millions of consumers who were shopping for investment vehicles for their individual retirement accounts.
By next week's April 15 deadline, U.S. taxpayers will have made an estimated $41 billion in IRA deposits for 1985, an increase of 14% over last year. Most consumers waited until the last few weeks before the tax deadline, even though they could legally have made last year's contributions anytime after Jan. 1, 1985. "This is the absolute peak of IRA mania right now," declares Brian Smith, senior vice president of the U.S. League of Savings Institutions.
The IRA has unexpectedly become the most important new financial investment vehicle in decades. By giving consumers an incentive to save and invest, the IRA tax deferral has provided a huge influx of new business for banks, thrift institutions and Wall Street brokerage houses. The total amount put into IRAs as of April 15 will be about $240 billion; by 1990 that total is expected to reach $500 billion. Those figures include Keogh plans, an equivalent of the IRA designed for self-employed individuals.
This gargantuan nest egg has also created greater financial security for the citizens who take part in the program. More than 27 million households, or about one-third of the U.S. total, have started at least one IRA. George Solomon and Anne Wyndham, a pair of Santa Monica, Calif., actors with a two- year-old son, each plan to start an IRA because of their uncertain future income in show business. Says Silverio Califano, 42, an Eastern Airlines aircraft inspector in Miami, who contributes to his account every year: "As far as I'm concerned, I think IRAs are the greatest thing."
The IRA flood started as a trickle in 1974, when the Government began permitting them for taxpayers who did not belong to a pension plan where they worked. But the flow of money into the accounts became a torrent in 1982, after Congress extended the program to virtually everyone. Under the current rules, working taxpayers may put as much as $2,000 a year into an IRA and deduct the contribution from gross income when filing their federal tax return. For those in the 50% bracket, it means an immediate saving of $1,000 in taxes for their $2,000 contribution. Savers must eventually pay taxes on the investment, but by the time they reach retirement age, their income is likely to decline and put them in a lower bracket.
Besides enjoying the tax deferral, IRA savers can watch their investment compound over the years. If a 30-year-old worker makes a $2,000 annual contribution for 30 years to an IRA earning an average of 10%, the account will balloon to $468,580. Those who withdraw their money before age 59 1/2, however, must pay taxes on the amount taken out, as well as a 10% penalty, which can make IRAs an unwise investment for consumers who think they will need the cash on hand.