Iras Always A Sensible Alternative To Paying Taxes The Sooner Started, The Greater The Sum Waiting At Retirement

It’s still not too late to cut your 1996 tax bill.

Individuals who qualify have through April 15 to contribute as much as $2,000 to an individual retirement account and deduct the amount from their taxable income. The money in the account then grows tax-deferred until it’s withdrawn.

“Anybody who can tax-deduct an IRA contribution and can afford it should absolutely put in the maximum they can - and they shouldn’t wait until April 14,” said Ray Ferrara, a certified financial planner in Clearwater, Fla.

The number of people eligible for the deduction fell after 1987, when new tax rules limited eligibility for tax breaks. Still, even those who don’t qualify for the deduction can benefit from IRA contributions because the investment grows tax-deferred, enabling it to go up much faster than a taxable investment.

“There are very few places now to taxdefer earnings on investments,” said Brian Mattes, a principal at Vanguard Group in Valley Forge, Penn., the nation’s second-largest mutual fund company with $255 billion in assets.

IRAs were created in 1981 to entice Americans to save more by providing tax incentives for squirreling away money. The accounts are offered by banks, mutual funds and brokerage firms, and are available in as many variations as there are conventional taxable investments.

“An IRA is a wrapper that you can put around almost any investment option,” said Ray Boser, director of retail qualified plans at American Express Financial Advisors in Minneapolis, which has about $45 billion of retirement assets under management.

Under the original rules, most individuals could set up an IRA and put in as much as $2,000 a year - $2,250 for married couples - which was deductible for tax purposes and grew tax-deferred.

In 1986, Congress eliminated the ability of many individuals to qualify for the tax deduction. Now, individuals covered by an employer’s or another retirement plan can deduct the full amount of an IRA contribution only if their adjusted gross income doesn’t exceed $25,000. They can deduct part of their contributions if their income falls between $25,000 and $35,000.

For married couples, combined adjusted gross income can’t exceed $40,000 to be eligible for the full deduction. Couples can deduct part of an IRA contribution if their income falls between $40,000 and $50,000.

While many taxpayers can’t deduct IRA contributions from their incomes, that’s no reason to shun them, financial advisers say. That’s because IRAs still offer individuals a way to save for retirement and put off paying taxes on investment earnings until they withdraw their money.

As with most investments, the rule of thumb on when to start making contributions is “the earlier the better,” financial planners say. An individual who begins making $2,000 yearly contributions to an IRA at age 18 would have almost $1 million to retire on at age 65, assuming an 8 percent annual return. By contrast, individuals who begin making contributions at age 30 would have $375,000 by age 65.

It also pays to make contributions as early in the year as possible, so the money has the maximum time to grow tax-deferred, investment professionals say.

While individuals must pay taxes on investment earnings withdrawn from an IRA in retirement, they often end up paying taxes in a lower bracket than if they were taxed during their peak earning years.

Individuals face a 10 percent penalty on IRA withdrawals before age 59-1/2, on top of taxes on investment earnings and deductible contributions - which could wipe out the benefits of tax-deferred savings. That means it’s important for individuals to figure in any possible needs for cash before retirement age when planning how much to put into an IRA.

“The downside is it does tie your money up before retirement,” said Kathy Burlison, tax researcher and training specialist at H&R Block Inc. in Kansas City, Missouri.

Many financial advisers urge individuals who aren’t eligible for deductible contributions to first invest the maximum allowable amount in their retirement plans before putting money in an IRA.

Even so, financial planners say IRAs are a good supplement to a retirement plan, especially as people are living longer and growing more uncertain about how much they’ll get in Social Security retirement benefits.

In the case of a job transfer or layoff, individuals can transfer or roll over retirement plan balances into IRAs and let the money keep growing tax-deferred.

A raft of recently passed and proposed legislation would make IRA investing even more attractive. Starting this year, many married couples can almost double the amount of money they can place in IRAs. The change allows non-working spouses to contribute as much as $2,000 a year to an IRA, bringing total allowable contributions for couples to $4,000.

Also, taxpayers now can withdraw money from IRAs for certain medical expenses without paying a penalty, but only under special circumstances, such as long-term unemployment.

Congress is mulling proposed bipartisan legislation that would make IRA investing more flexible and eligible for more tax breaks. The Clinton administration has also voiced support for ways to make saving for retirement easier and more attractive.

Included in the proposal, sponsored by Sen. William Roth, a Delaware Republican, and Sen. John Breaux, a Louisiana Democrat, are proposals that would let individuals deduct IRA contributions regardless of income or enrollment in a retirement plan.

The bill may not get far because Congressional attention again appears to be shifting toward balancing the budget and less on tax relief.