New ways to save for now and retirement
By Laura Bruce • Bankrate.com

President Bush's proposed tax-free savings and streamlined retirement plans are getting slammed by some politicians who say the accounts primarily will benefit the rich, but financial planners seem to like them.

The proposal allows individuals to save up to $15,000 a year in after-tax money. It grows tax-free and distributions are tax-free. In addition, workers could contribute to an employer-sponsored 401(k)-type plan.

"It's a boon for investors. If we throw all three plans together, they're like Roth IRAs on steroids," says Stephen Barnes of Barnes Investment Advisory in Phoenix, Ariz.

"People are grasping at straws to counter-argue these proposals. Clearly, there are people who won't be able to put away the full amount, but just as clearly there are people who could save significantly more. This is a good compromise without making them the exclusive toy of the wealthy.

"Give me a break. If you're a person of wealth, $15,000 isn't going to change your standard of living. But for the vast majority of lower middle and middle class Americans, these are a tremendous benefit."

Here is a summary of the three proposed plans:

Lifetime Savings Accounts
Can be used for any type of saving. Individuals, regardless of income or age, can save up to $7,500 a year. Contributions are not tax-deductible, but the money grows tax-free and distributions are tax-free. Money can be withdrawn at any time for any purpose. Anyone can contribute money to the account. In other words, a parent or grandparent could set up an account for a child and fund it. The contribution limit will be adjusted for inflation each year.

Prior to Jan. 1, 2004, you can convert balances in an Archer Medical Savings Account, Coverdell Education Savings Account and Qualified State Tuition Plans to a Lifetime Savings Account. Balances in those accounts cannot be converted after 2003.

Retirement Savings Accounts
These accounts can be used only for retirement saving. Contributions must come from earned income, but there are no income limitations. Individuals may contribute up to $7,500 a year. Contributions will not be tax-deductible, but the money will grow tax-free, and distributions after age 58 are tax-free.

Existing Roth IRAs will automatically convert to Retirement Savings Accounts. Traditional and nondeductible IRAs may be converted to Retirement Savings Accounts, but any taxes due would have to be paid. If you do the conversion before Jan. 1, 2004, you can spread the tax bill out over four years. No one will be required to convert their traditional or nondeductible IRA, but you won't be able to contribute to them after 2003.

Employer Retirement Savings Accounts
The president's proposal consolidates 401(k), thrift, 403(b), and governmental 457 plans, as well as SARSEPs and SIMPLE IRAs into Employer Retirement Savings Accounts, which can be sponsored by any employer.

Employer Retirement Savings Accounts will follow the existing rules for 401(k) plans, but the rules will be simplified.