New ways to save for now and retirement
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
"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can be withdrawn at any time for any purpose.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
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
Employer Retirement Savings Accounts will follow the
existing rules for 401(k) plans, but the rules will be simplified.