WASHINGTON - Bank industry representatives told Congress Tuesday that the Republican "Contract with America" proposal for individual retirement accounts should be overhauled.
The "American Dream Saving Account," as the GOP proposal is called, would not attract investors unless taxpayers are permitted to take a deduction when contributing to the account, said Manuel J. Mehos, chairman, president, and chief executive of Coastal Banc Savings Association, Houston. The proposal now postpones tax benefits.
"The savings goals of the ADSA are commendable, but more needs to be done," said Mr. Mehos, who testified before the House Ways and Means Committee on behalf of America's Community Bankers, formerly known as Savings and Community Bankers of America.
"It is the view of ACB that the tax-deductible IRA is one of the most effective means ever devised of encouraging individual retirement saving," he said.
Both ACB and the American Bankers Association expressed misgivings about the fact that the ADSA is a "back-loaded" IRA. Instead of offering a deduction on contributions, it would exempt interest and capital gains income when funds are withdrawn.
The ability to get an immediate reduction in one's tax bill creates a "powerful psychological impetus in favor of IRA participation among our customers," Mr. Mehos said.
The GOP proposal should be made more flexible, to offer both back-loaded and front-loaded options, recommended Raymond W. McKee, senior vice president and general tax counsel for the Bank of America unit of BankAmerica Corp.
"A tax-favored savings plan should be flexible enough to offer both options to customers, since the decision as to which plan would be preferred may differ among individuals," said Mr. McKee, who testified on behalf of the ABA.
House Ways and Means Committee Chairman Bill Archer, R-Tex., countered by citing a recent news article in which economists Martin and Kathleen Feldstein said the ADSA "can produce as much benefit as the traditional front-loaded IRA."
The back-loaded IRA appeals to Republican legislators because it offers an opportunity to increase savings and investment without an immediate revenue hit.
Mr. Mehos said his group favors the "Super IRA" bill - proposed by Sen. William V. Roth, R-Del., and Sen. John Breaux, D-La. - which provides for fully deductible IRA contributions.
