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A new era looms for IRA
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March 14, 2000: 6:03 a.m. ET
Lawmakers propose increasing fund contributions to $5,000 from $2,000
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - Back in the early 1980s, the Dow Jones industrial average was below 1,000, "Dallas" was a hit TV show, and Congress approved a law allowing you to save up to $2,000 a year in individual retirement accounts.
Nearly 20 years later, a lot has changed. But you still can't save more than $2,000 a year in your IRA.
Lawmakers are considering proposals to raise the savings limit to $5,000 from $2,000, the level established in 1981. Financial advisers say it's about time.
"What we should be trying to do is to encourage people to establish private retirement accounts and help them take pressure off the Social Security system," said Rep. Dennis Moore, D-Kan., one lawmaker who has proposed a bill increasing the limit. Rep. Elton Gallegly, R-Calif., has proposed a similar bill.
$2,000 in 2000?
It's uncertain when the proposed limits will come up for a vote, especially during this election year. But financial experts agree that it's time for the contribution limit to be addressed.
"That's a much more significant amount," certified financial planner William Brennan said of the $5,000 proposal. "There would be more enthusiasm by a larger group of people to save for retirement."
Consider some statistics that show your money doesn't go nearly as far as it used to. For example, $2,000 back in 1981 was equal to nearly $4,000 in 1991 dollars, according to official U.S. figures. Likewise, $2,000 in 1999 is equal to about $1,000 back in 1981.
It's all politics
The rules governing who's eligible to open an IRA and contribute on a tax-deductible basis are based on income levels and whether you already contribute to an employer-sponsored plan, such as a 401(k).
Lawmakers haven't decided if they will propose raising the income limits or introducing other restrictions. And it's also uncertain how the $3,000 increase would be phased in -- either immediately or gradually over several years.
Non-working spouses got a break a few years ago. In 1997, the contribution limit for a non-working spouse was raised to $2,000 from $250, increasing the limit for couples to $4,000 a year from $2,250.
From a bill to law?
So if the IRA contribution limit is raised, how should you be funding your existing retirement plan?
"If this (bill) goes into effect, I would look seriously at redirecting money into the IRA up to the $5,000 limit," said certified financial planner Don Boegel in Minneapolis. However, you should keep in mind all of your options, he said.
Maximize your 401(k) contributions. If you're thinking about stashing away more money for retirement, first siphon it into your employer-sponsored plan, Boegel said. Those contributions are pretax dollars and employers often match them by 3 to 5 percent.
Assess any long-term taxable accounts. Financial experts agree that you should consider contributing more to your IRA than your taxable accounts such as mutual funds, because of the benefit of compounding.
However, if you have a mutual fund with huge gains, you may want to keep the money where it is instead of selling it and paying a large tax bill on that money, Brennan of Columbia Financial Advisors notes.
"A CD or savings account that doesn't have a lot of gains" may be the type of account to cash out and deposit into your IRA, he said.
Keep track of your cost basis. If you decide to sell a taxable account such as an equity mutual fund and put the cash into a nondeductible IRA, keep track of your taxes using IRS form 8606, said certified financial planner Scott Kahan. Otherwise, you'll pay Uncle Sam twice when you withdraw from your traditional IRA.
Other proposals
This seems to be the year for retirement plans, as lawmakers are abuzz with proposals.
President Clinton has come up with another idea to help Americans save for their golden years. Under the Retirement Savings Account proposal, the government would contribute matching amounts to voluntary contributions. It's geared toward low- and middle-income people who may not have a 401(k) plan at work.
Click here for more information on the Retirement Savings Account proposal.
Meanwhile, Senate Finance Committee Chairman William Roth, R-Del., the father of the Roth IRA, wants to increase contributions to that retirement savings vehicle. A Roth IRA allows eligible taxpayers to put in up to $2,000 of taxed income annually, and withdraw it with no additional tax at age 59-1/2.
Currently, singles earning less than $110,000 and couples earning less than $160,000 are eligible to contribute to a Roth IRA.
And the House of Representatives passed a minimum wage hike earlier this month that included a gradual increase in the 401(k) contribution limit.
"If it's a straight increase without other hooks in there, it's a great thing," said Scott Kahan, president of Financial Asset Management Corp. in New York City. 
-- Click here to send e-mail about this story to Staff Writer Jennifer Karchmer.
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