New ways to save for now and retirement

Jack Everett, certified financial planner with The Financial & Tax Planning Center in Roseville, Calif., says he's a little concerned that people will fund the Lifetime Savings Account first.

"Why tie my money up when I get the same benefit without tying it up? But that's scary because it makes it so accessible.

"People should fund the ERSA to the max first. You get the tax-deductible benefit right away and a lot more money is being put aside. If you do it with after-tax dollars and can only afford $100 a month, then all you get is $100. But with pretax money you could afford to put in about $150."

So, will people be better off contributing after-tax dollars to Lifetime Savings Accounts or Retirement Savings Accounts and growing the money tax-free, or is the current tax-deductible IRA a better deal?

Jason Flurry, a certified financial planner and president of Legacy Partners Financial Group, Woodstock, Ga., says it may depend on your age and your determination to save.

"If you're young, say, you have at least 20 years until retirement, and if you're a disciplined saver, [Lifetime Savings Accounts or Retirement Savings Accounts are] a better option. But if you're 10 to 15 years away from retirement it won't make that much of a difference."

Flurry worked up the following examples:

Fred and Wilma under the current system:
Fred and Wilma are 54 and 52 years old, respectively. Fred makes $50,000 a year. Together they put a total of $7,000 into deductible IRAs, which gives them a tax deduction of $1,960. They have $60,000 in the IRA. They'll save $7,000 each year until Fred reaches age 65.

Assuming a 7 percent rate of return, the $7,000 a year in contributions and the $60,000 already saved will equal $236,776 by the time Fred is 65. After taxes they'll have $170,478.

If they took the $1,960 tax deduction they got each year and invested it they'd have an additional $21,560 saved over the 11 years. Invested at 7 percent (5 percent after tax), that money grows to $27,845. If Fred and Wilma simply pocket that $1,960, the IRA falls even farther behind.

$27,845 + $170,478 = $198,323.

Fred and Wilma investing in the Lifetime Savings Account:
They leave the $60,000 in the traditional IRA. It grows to $90,929 after taxes.

The $7,000 that was going into the IRA every year now goes into the Lifetime Savings Account and grows tax deferred for 11 years. It grows to $110,485.

$90,929 + $110,485 = $201,414.

"They'd be $3,091 ahead at retirement using the LSA. They've only added about 1.5 percent to their overall retirement nest egg. That's irrelevant, you'd get that with normal fluctuations," Flurry says.

But for a younger couple, the difference can be substantial.

Barney and Betty under the current system:
Barney and Betty are ages 30 and 28. They have an annual income of $40,000 and contribute a total of $4,000 each year to their IRAs. The tax deduction on the contribution is $1,120.

They have an existing IRA balance of $20,000. Combine that with the annual $4,000 contributions at 7 percent a year, and it grows to $551,864 after taxes over 35 years.

Assuming they save the $1,120 annual tax deduction and invest it at 7 percent (5 percent after tax), it grows to $101,158 for a net retirement nest egg of $653,022. Again, if they pocket that tax deduction, the Lifetime Savings Account looks even better.

Barney and Betty investing in the Lifetime Savings Account:
The existing IRA that they didn't convert will grow to $153,743 after taxes.

They fund the Lifetime Savings Account with $4,000 a year for 35 years at 7 percent. That grows to $552,947.

$552,947 + $153,743 = $706,690.

That's $53,668 better than under the IRA, an additional 7.5 percent by using the Lifetime Savings Account

If you'd like to see the president's proposals in greater detail, click here.

To see how it works out under various incomes, click here.