Lower interest rates turn some holders of IRAs into investors

Thanks to lower interest rates, a lot of savers with individual retirement accounts (IRAs) are becoming investors. When they could get 14 or 16 percent yields at the corner bank, the risks of going elsewhere weren't worth considering for many people, particularly with savings aimed at retirement. But when the best yields on certificates of deposit are in the 8 or 9 percent range, some savers are willing to try a little more risk in return for potentially greater reward.

At the same time, these future retirees are starting to see some heavy balances in their IRA statements. Those balances may tempt people -- and maybe their brokers -- to try a lot of fancy and riskier new investments. Experts caution, however, that there's still good reason to treat the IRA as what it is: one ingredient in a secure retirement.

The average balance in an IRA is $3,500 to $5,000, says Wesley Howard, editor of the IRA Reporter, a newsletter published in Cleveland. ``In another year or so, you'll start to see these balances move up.''

In some cases, those balances have already moved up, particularly among working couples who can afford to make their maximum $4,000 annual IRA deposits.

``Many people are somewhere in the $6,000-to-$10,000 range. That's when it becomes serious money,'' says Bruce Behling, president of the Milwaukee-based Strong Funds. ``After three years of accumulation, people have begun to look at the IRA as an investment, not just a tax deduction.''

The growing balances, together with lower interest rates, are beginning to get people thinking about diversifying, often into stocks or mutual funds. Since the stock market started moving up again last January -- and interest rates moved down in the fall -- more money has been flowing into these vehicles, Mr. Howard says. From January to the end of April (the last period for which he has complete figures), consumers began a ``big shift'' of assets out of banks and into stocks and mutual funds.

A shift of IRA money may also account for greater household participation in the credit markets. This participation, noted recently by Moody's Bond Survey, meant that the household share of credit market sources jumped from 12.2 percent at the end of 1984 to 15.2 percent at the end of this year's first quarter. The cumulative dollar total from these households went from $105.9 billion to $156.9 billion.

To Mr. Behling, the $10,000 level can also be seen as a ``critical mass,'' where a return on investment of 20 percent or more exceeds the annual $2,000 contribution limit. Some mutual funds have been providing yields at this level or higher. Also, $10,000 is the minimum for investments such as Treasury bills.

``This is a very interesting situation for some people,'' observes Dodge Dutcher, director of trust services for Shearson Lehman Brothers. ``Many of these people who have $6,000 to $10,000 have never accumulated that much before.''

With that much money, people can now start diversifying, to protect the IRA from market swings or sudden interest rate changes. A common way of doing this at this point is to break the IRA into two or three types of investment, reflecting varying degrees of risk and investor sophistication. Three common routes, says Donald Underwood, director of retirement planning at Merrill Lynch, are CDs, mutual funds, and zero-coupon bonds.

Also, Mr. Underwood notes, people will sometimes use a new year's IRA contribution to try a new IRA vehicle. ``Suppose somebody opened a $2,000 last year,'' he says. ``This year, they'll keep it and open a new one somewhere else.''

You might, for example, have started an IRA with a mutual fund last year. The fund may not have made significant gains since, but you know it has a good record of long-term growth. This year's IRA installment might be made with a different mutual fund, a zero-coupon investment such as government-backed CATS or TIGRS available through major brokerages, or a self-directed account for trading in the stock market, also available through a broker.

Most responsible brokers, Mr. Underwood added, should understand the difference between the goals of an IRA and those of a more speculative account a customer might use just for return on investment. He suggests individuals try to reach the same understanding and let the IRA grow gradually but surely.

In the future, as the IRA reaches the $40,000 or $50,000 level, you may feel comfortable taking much more risk with a small portion.

But in the meantime, a conservative approach with a little diversification seems the wisest course. An exception to this would be affluent individuals who do not expect to need the IRA to ensure a secure retirement. Summer job withholding Q My 17-year-old son is working at his second summer job. This year, as well as last year, his employer is withholding money from his pay for income taxes, even though he won't make enough money pay any taxes. Is there some way he can avoid withholding?-- N. T.

Yes. As long as your son expects to make no more than $3,430 for the entire year, he does not have to have money taken out for federal taxes. Many employers automatically withhold money for taxes from summer workers as well as from full-time employees. But this is unnecessary and can be avoided by checking Box 6b on Form W-4. If your son checks this box and is still having money withheld, have him point this out to his payroll department.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.