The Bush administration on Friday unveiled its plan to create two new types of savings accounts that would allow a couple to save as much as US$30,000 a year in funds that could be withdrawn, with any investment gains, free of taxes.
Everyone would be able to contribute to the plans, with no limitations based on age or income. For people with plenty of money, the accounts would offer powerful new ways to build wealth.
A person could contribute up to US$7,500 a year to a Lifetime Savings Account, which would generate investment income tax free, then use the money for any purpose, not just buying a home or paying for education. Withdrawals could be made at any age and would also be tax free.
That same person could also contribute up to US$7,500 a year to a Retirement Savings Account, which would replace today's individual retirement accounts and Roth accounts, among others. After the saver reached age 58, withdrawals would be free from taxes and penalties. The saver's spouse could set aside those amounts each year, a total of US$15,000, in such accounts.
The accounts "make saving simple for everyone and for every purpose," stated Pamela F. Olson, the assistant treasury secretary for tax policy, in a department statement. "No longer will individuals have to worry about the confusing alphabet soup of six different savings accounts."
Though the proposals are described as simplifying a mosaic of savings plans, choosing the best way to harness the new plans would still be a complicated matter.
"This is not going to be simplified, believe me," said Steven G. Lockwood, president of Lockwood Pension Services and the author of "Individual Retirement Account Answer Book."
"But it's all good news," he said. "People will walk away from this with more money."
Some of the complexity would arise as savers made decisions about how to invest their money in the new accounts -- decisions with new twists if the administration's plan to make dividends tax exempt goes forward.
In addition, people would have to compare the merits of saving through one of the new individual accounts with those of any retirement account they are offered at work.
The Bush administration is also proposing to reshape work-based retirement plans like the 401(k) account, calling the successor plans Employer Retirement Savings Accounts. The advantages and disadvantages would vary depending on each person's age, goals, tax bracket and other factors.
Like many other financial analysts, Lockwood noted that the benefits of the new accounts would flow only to those who have money to save. The accounts would have little effect on people who live from paycheck to paycheck.
Indeed, some benefits consultants warned that the new accounts and proposed rule changes on accounts sponsored by employers could combine to eliminate the incentives for some companies to offer retirement savings plans to their workers.
"If you're a small-business employee, what this could potentially mean is your employer will no longer offer a program for you," said Brian H. Graff, executive director of the American Society of Pension Actuaries.
The new accounts appear to threaten certain existing financial services, because they would dampen public enthusiasm for some investment instruments, like annuities and education savings accounts.
The proposals could provide a one-time increase in federal tax revenues. The new plans have incentives to encourage savers to withdraw money from their old retirement savings accounts, pay the applicable taxes and put the funds into the new accounts. People who convert from IRAs in the first year, for example, will be allowed to stretch the tax payment over four years.
When those people retire, though, they will be able to receive income free from taxes, meaning less federal revenue in later years.
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