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Tax Bill Sparks Investor Interest

December 7, 1997

WASHINGTON (AP) _ It took a while for investors to notice, but the 1997 tax bill greatly expanded retirement savings options, one of which promises huge tax savings. Wall Street is reporting heavy investor interest and is cranking up a major marketing campaign to meet the demand.

Much of the interest revolves around a new type of Individual Retirement Account, the so-called Roth IRA, which goes into effect Jan. 1.

``I would say it’s the most interest we have ever seen on anything,″ said John Michel, a marketing director at Merrill Lynch & Co.

The nation’s biggest mutual fund group, Fidelity Investments has fielded calls from ``tens of thousands of people,″ said Judith McMichael, a vice president for marketing at the Boston investment firm.

``We have significant demand here,″ she said.

Named after Senate Finance Chairman William V. Roth Jr., R-Del., the Roth IRA turns the concept of the traditional IRA on its head.

With a traditional IRA, you get a tax deduction for contributions, which are capped at $2,000 a year.

But there’s no deduction for contributions to Roth IRAs. Investors who qualify pay taxes on money they contribute to a Roth IRA, which can hold stocks, bonds or mutual funds.

But if you follow the rules, that will be the last tax you will ever pay on a Roth IRA.

The funds grow tax-free and you don’t have to pay taxes when you withdraw upon reaching age 59 1/2, or in case of disability, death or first-time home purchase. There’s a five-year waiting period before you can withdraw funds.

``Any money that’s in there is going to be completely tax free forever,″ said Brian Whitlock, a CPA with Blackman Kallick Bartelstein LLP in Chicago. ``I’ve run the numbers on this thing and it would appear to me it makes sense in every situation.″

For example, $1,000 invested in a Roth IRA at a 7 percent interest rate by a taxpayer in the 28 percent bracket would grow to $1,967 after 10 years. The same amount in a taxable savings account would only grow to $1,635 over the same period after accounting for taxes.

Eligibility for a Roth IRA phases out for singles making more than $95,000 and couples making more than $150,000.

Some experts caution that Roth IRAs aren’t for everyone. They may not make sense for people who are near retirement, since they wouldn’t gain the benefits of tax-free compounding that a younger person would enjoy.

In addition, the Roth IRA may not be the best option for people whose tax rates drop in retirement. In that case, investors will have paid higher taxes on the income while working and could have enjoyed a substantial break in the lower bracket upon retirement.

As word about the new retirement accounts filters out, mutual funds, investment firms and banks are reporting high interest from investors.

The Kansas City, Mo.-based American Century Investments, a major mutual fund group, gets about 10,000 client calls daily, and ``one call out of four concerns the new IRA legislation,″ said spokesman Gunnar Hughes.

Merrill Lynch has launched an aggressive outreach effort, holding at least 700 tax planning seminars since passage of the bill, and has printed some 400,000 tax guides, which describe the Roth IRA and other changes. Merrill Lynch has been running television ads in recent weeks touting the Roth IRA. It fields hundreds of calls daily from its brokers and investment advisers with technical questions about the Roth IRA.

``We can’t get enough information out,″ Michel said.

Many mutual funds and investment firms are mailing out detailed and consumer-friendly brochures or posting information on their company Internet sites.

On Friday, Fidelity plans to launch a new ``IRA evaluator″ on its World Wide Web site, an interactive tool to help answer IRA questions.

One of the major considerations is whether investors should convert or ``roll over″ their existing IRA into a Roth IRA.

Investors who make less than $100,000 can make such a conversion, but they have to pay income taxes on the amount transferred into the Roth IRA.

The tax bite can be substantial. To convert a $100,000 traditional IRA into a Roth IRA, taxes would total about $30,000. But the new law will let investors spread the tax payments over four years, bringing the yearly tax payments down to $7,500 a year in this case. And lawmakers waived the usual 10 percent penalty tax for early withdrawals from an IRA.

In some cases, it may be worth it.

``What I will have done is taken $100,000 and converted it into a tax free, accumulating compounding account, forever,″ Whitlock said.

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