Congress considers fully tax-deductible IRA for all

Coming soon. Maybe. The new, improved, undiluted IRA -- a retirement savings and investment plan for all who work for wages.

It took a stubborn recession to do it, but a possible tax cut along with a series of investment incentives are in the wind in Washington.


An upsurge of congressional interest in reviving the American economy with lower taxes could foreshadow a break for the nation's middle class, a stimulant for business, and an expansion of the IRA program for savers and investors.

You remember IRAs. Perhaps you still have one. But many holders of Individual Retirement Accounts largely abandoned them when Congress reduced their tax deductibility feature five years ago.


Now, with saving, investing, and economic recovery efforts attracting attention of lawmakers, the universal IRA is back in favor as part of proposed anti-recession legislation.

"For millions of Americans, the IRA is an old friend they would like to have back," said Sen. Lloyd Bentsen, D-Texas, the prime mover of a drive to expand the IRA program, although other legislators are floating similar proposals.

The Texan's initiative has been getting most of the attention, largely because of his clout on Capitol Hill.

"As chairman of the Senate Finance Committee, Mr. Bentsen has the most influence in getting something like this accomplished," said Jennifer Martin, assistant editor of the IRA Reporter, a newsletter that covers the issue.

The Bentsen plan puts forth a tax cut proposal that would include IRA deductions of up to $2,000 a year. That's the way it was 10 years ago when a limited IRA program that started in 1974 was broadened to cover all workers.

But what Congress giveth, Congress taketh away. Its 1986 tax reform package limited tax-deductible annual IRA contributions to most workers not covered by regular pension plans. That had the effect of sharply reducing taxpayer contributions into IRA accounts.

From a peak of $38.3 billion in 1986, contributions in ensuing years plunged. In 1990, the total new money going into IRAs was only $11.5 billion, according to an estimate by the IRA Reporter.

Some of the current initiatives would restore the earlier arrangement that was so popular. Others would provide something similar. An IRA restoration bill proposed last spring by Mr. Bentsen and a Republican colleague, Sen. William V. Roth Jr., of Delaware, got nowhere. Recently, Mr. Bentsen announced a new version linked with tax-credit proposals.


The IRA-tax cut plan of the senator from Texas who was Michael S. Dukakis' running mate in the Bush landslide of 1988 is getting enthusiastic reviews from surprising quarters. The Heritage Foundation, a conservative think tank in Washington, says the ,, Bentsen plan would help "generate economic growth."

"Because of his leading role in the Senate on tax matters, Bentsen's initiative dramatically increases the likelihood that an anti-recession tax cut may become law," said Daniel J. Mitchell, a senior fellow with the Heritage Foundation.

Under current law, a fully deductible $2,000-a-year IRA contribution is available only to people not covered by a pension plan and with individual income under $25,000 or family income under $40,000. The Bentsen plan would broaden it to cover all wage earners, regardless of income or other retirement arrangements, and would index it to the inflation rate.

Taxpayers would be given a choice: to take the deduction when the money is invested or not to pay taxes on the funds as they are withdrawn. Penalty-free withdrawals could be made to pay LTC for a first home, for college tuition, or medical expenses that exceed 7.5 percent of income.

Another part of the Bentsen plan would grant a $300 tax credit for children under 18. The entire package -- estimated to cost $72.5 billion over five years -- would be financed by a 5 percent cut in defense spending.

The downside of all the tax cut and IRA expansion proposals is the possibility that lower federal revenues would result, leading to still another increase in a budget deficit estimated at more than $300 billion.


But supporters of the plans argue that they will encourage Americans to work harder, save and invest more, and move the economy upward. In the long run, they say, higher revenues and lower deficits would develop.