Bush Administration Proposes Restructuring of Savings Plans
February 3, 2003
On Friday, the U.S. Department of Treasury proposed dramatic changes in how Americans would save for everything from retirement to their next vacation. Details of the Bush administration plan are still being worked out.
As is the case with most significant modifications in the laws governing savings and retirement accounts, there will likely be a very long and involved process before a major change, if any, is passed by Congress and signed into law by the President.
Under the proposal, the Bush administration, effective in 2003, would consolidate all future contributions to Individual Retirement Accounts (IRA) into a single Retirement Savings Account (RSA), create a new Lifetime Savings Account (LSA) for all other personal savings purposes and reconfigure all employer-sponsored savings programs into Employer Retirement Savings Accounts (ERSA).
Here is a brief description of each type of account and how it would change existing savings practices:
The Retirement Savings Account (RSA) would be used for retirement investing only. These accounts would consolidate Traditional IRAs, nondeductible IRAs and Roth IRAs into one account. (After the adoption of the RSA, additional contributions to IRAs would not be permitted. At the participant’s option, Traditional IRAs could be converted to the new RSA, with taxation of the amount converted.) The proposal calls for a $7,500 limit on RSA contributions in 2003, which would be adjusted for inflation. RSAs would not provide a tax deduction, but earnings and payouts would be tax-free when withdrawn after age 58, or upon disability or death. There would be no limit on age or income. Income must be earned, although spousal contributions would be permitted as in the existing plan.
A new plan is proposed that would permit tax-advantaged savings for any purpose, without the usual restrictions associated with IRAs. Lifetime Savings Accounts (LSA) would allow anyone to save for any type of purpose, including children’s education, a new home, healthcare needs, or to start their own business. The new LSA would allow an individual, regardless of age or income, to contribute $7,500 a year and make penalty-free withdrawals at any time— with no holding period. The income would not need to be earned, so contributions could be made on behalf of children. Like Roth IRAs, contributions to an LSA would not be deductible but earnings would accumulate tax-free, and distribution would be tax free as well. There would be no restrictions on when the money could be distributed.
The third major change proposed by Treasury involves workplace savings plans. President Bush’s proposal to revamp tax-advantaged savings plans calls for the consolidation of governmental 457,
The new ERSAs, according to the U.S. Treasury, would closely follow existing rules for private sector 401(k) plans, but be greatly simplified. (Like governmental 457 plans, 401(k) plans allow tax-deferred contributions and taxable distributions upon retirement.) Participants would be able to contribute up to $12,000 in 2003 (an additional $2,000 for those 50 and older) with a scheduled increase to $15,000 in 2006 (and an additional $5,000 for those 50 and older). It appears that certain favorable 457 provisions, such as penalty-free withdrawals before age 59 1/2, would be eliminated, under the Bush proposal.
ICMA-RC will provide additional details on the Treasury plan as they become available.
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