News: Analysis & Commentary: MARKETING
AN AVALANCHE OF NEW IRAs?
Brokers are talking them up, but new savings may be small
For banks, mutual funds, and stockbrokers, 1998 promises to be the Year of the IRA. After spending a decade lobbying for a broad expansion of tax-advantaged individual retirement accounts, Wall Street now hopes to reap the benefits.
Some investment pros expect the tax law signed by President Clinton on Aug. 5 to boost annual IRA contributions fivefold to nearly $50 billion. Investment houses are about to inundate taxpayers with marketing designed to sing the praises of the new accounts. Merrill Lynch & Co. has already taken out big newspaper ads promoting the new bill. There's certainly a huge, untapped market out there: In 1985, before participation was curbed, 16 million taxpayers invested in the accounts. These days, barely 4 million do.
But the new law's complexity will make marketing tough (table). It expands existing accounts and creates two new ones, each with different tax advantages and eligibility rules. "We're challenged on how to cut through the clutter," says Douglas E. Harrison, T. Rowe Price Associates' marketing manager for individual retirement products.
The Roth IRA would let investors avoid taxes on earnings in the account but would not provide tax deductions for contributions that existing IRAs enjoy. That could be a more lucrative benefit for those patient enough to wait. Merrill Vice-Chairman John L. Steffens says marketing themes will center on: "Do you want a tax deduction now or an even bigger tax deduction in retirement, when you might need it most?"
While funds and discount brokers may have trouble communicating the complexity to their customers, full-service brokers see it as a marketing opportunity. Steffens calls IRAs "a terrific starter product" for attracting young investors.
TAX WINDFALL. Despite brokers' dreams, some experts think IRAs may have a surprisingly small payoff--for Wall Street and the economy. Skeptics warn that much of the money expected to pour into IRAs will merely be shifted from existing taxable accounts. There is some debate over the issue, but that helps explain what happened during 1982-86, when IRAs were quite popular, but the personal savings rate plummeted from 8% to 4%, where it has stayed.
If such shifting reoccurs, the result will be a tax windfall for savers but little new business for investment firms and a small boost in new savings available for investment.
How much new money will flow into IRAs is anyone's guess. But Wall Street--which lives by the axiom that investments are sold and not bought--is drooling at the opportunity to find out.By Howard Gleckman in Washington, with Jeffrey M. Laderman in New YorkReturn to top
Next Year's Changes
Wall Street is salivating over an expanded array of individual retirement accounts.
Tax-deductible contributions will be available to joint filers earning up to $50,000 in adjusted gross income, up from $40,000. Penalty-free withdrawals will be allowed for education and first-time home buyers.
In these accounts, earnings can build up tax-free, but there's no deduction for contributions. Available for joint filers earning up to $150,000 and singles earning $95,000. Taxpayers making less than $100,000 can roll traditional IRAs into the accounts.
DATA: JOINT COMMITTEE ON TAXATIONReturn to top