Third of a Series.

Newly proposed IRA-like options could revitalize the market for tax- deferred savings accounts, the American Banker Consumer Survey indicates.

Of the 1,031 respondents, 33% were very interested and 26% somewhat interested in one or more of three such ideas: allowing accumulation of funds for a home, college education, or medical expenses.

By contrast, 44% of the financial consumers surveyed - people who have at least one type of account at any institution - said they have individual retirement accounts.

IRAs lost much of their luster 10 years ago when tax advantages were scaled back. Some economists contend the tax reform halted a beneficial boost in personal savings.

A new breed of tax-deferred products could, from that standpoint, help the economy while giving banks another weapon for their competitive arsenal. And there are signs that younger people would not need as much persuading as they did to think about retirement savings.

But with their deemphasis of IRAs, banks may have lost whatever marketing edge they once had. Of the 44% with such accounts, 32% have them at banks versus 70% at other types of institutions. (An overlapping 5% said they maintain IRAs at banks and other types of institutions.)

Banks' IRAs have appealed mostly to older people, veterans of the time before the tax change. Almost half of the IRA customers above age 55 have at least some of their funds in banks. The same can be said for only 28% of those under 45.

Still, IRAs are owned by 51% of financial consumers age 35 and older, and 55% of those above the $40,000 household-income level. Of the IRA holders, 59% made their last contribution in 1995 or 1996, but that percentage declined in tandem with increases in the age and income levels of those responding.

The American Banker data, compiled in interviews in September and October by the Gallup Organization of Princeton, N.J., suggest many consumers would buy into a liberalized IRA or new ideas like the medical savings account, which Congress authorized last year for a limited experiment.

As the IRA law is structured, holders are penalized if they withdraw funds for purposes other than retirement.

Changes in tax rules that would allow consumers to drawn down their money without penalties were considered in the last session of Congress.

American Bankers Association members have testified before Congress on the implications of the more stringent tax laws, said Virginia McGuire, a spokeswoman for the trade group. "We are in support of creating greater tax incentives for consumers to save," she said.

Paul C. Taylor, senior economist for the thrift trade group America's Community Bankers, said it is likely that the next Congress will propose penalty-free withdrawals from IRAs for medical emergencies, home purchases, and education costs.

If the tax code changes give consumers more incentives to set up tax- deferred accounts, banks and other financial institutions might do well to aim their marketing at young adults.

Half of the survey respondents from ages 18 through 34 were "very interested" in at least one of the nonretirement savings options; 77% were either somewhat or very interested.

In that age group, 61% were somewhat or very interested in the idea for college expenses, 60% for down payment on a home, and 54% for health care.

As with IRAs, the level of interest trailed off with age. Among those 35 to 44, 55% were somewhat or very interested in the college account, 44% in home payments, and 45% in health care.

Banks could attract the younger customers through a savings plan and perhaps eventually cross-sell mortgages and other products according to life stage and style.

"Once you establish a customer relationship, you're going to want to hold onto it for the long term," Mr. Taylor said. "The community banks in our organization are trying to become, and are clearly becoming, fuller- service financial institutions."

Overall, consumers expressed the most interest in tax-deferred savings for medical and health costs. Seventeen percent were very interested and 25% somewhat interested, for a total of 42%.

The college education account was about equally attractive, at 41%, but had a higher percentage of "very interested" - 23%.

The home-payment account trailed, with 17% very interested and 20% somewhat interested.

IRAs or the IRA concept might need a shot in the arm to appeal to the up-and-coming generation.

Only 27% of respondents 18 to 34 (those up to age 32 are considered "Generation Xers") said they had IRAs. That increased to 48% of those 35 to 44, and well over 50% between 45 and 64.

Once they have IRAs, however, the younger people are far more likely than average to have invested recently - 82% of IRA holders 18 to 34 did so within the last two years. This is, in large part, a function of their more recent opening of accounts.

Perhaps because they are beginning to think seriously about retirement or investing money in other ways, 58% of IRA owners 45 to 54 said they put money into their accounts in 1995 or 1996. Only 34% of those over 55, who are near or past the age allowing tax-free withdrawals, contributed in those two years; more than one-fourth of them had not made a contribution in the 1990s.

"The Generation X group is very savvy in many ways and very entrepreneurial," said Mr. Taylor. "They know the future is going to be different for them and they don't have as much faith in plans such as Social Security."

A Louis Harris & Associates survey, released in October by Primerica Financial Services, showed Gen Xers to be financially more optimistic than the preceding baby-boom generation - except when it came to faith in the Social Security system - and were eager for investment alternatives.

Only 5% of Gen Xers expected Social Security to be their primary source of future income, versus 10% of the boomers. But the younger cohort also wanted help with their decisions: While 30% of them expected 401(k) plans to provide the bulk of retirement income, only 40% professed to be very knowledgeable about them.

Next: Demand for diversification

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.