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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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February 13, 2003
"President Bush’s New Retirement Plan Proposals"
 Listen
The retirement savings system in America has become a jumble of many
different plans -- IRAs, Roth IRAs, 401k's, SEP-IRAs, Keoghs, 403b's, and on and
on -- and so President Bush, through the Treasury Department, has proposed to
simplify and expand the whole system so people can save more, tax-free. If
these proposals were enacted as is, which is unlikely, it would completely
revolutionize the way you save for retirement and introduce a new alphabet
soup of retirement plans.
Here is a quick rundown on what Bush is proposing:
Lifetime Savings Accounts (LSAs) would allow you to contribute up to
$7,500 a year, have it grow tax-free, and be able to take the money out
anytime you want for any reason; you won’t get a tax deduction for
contributing. The LSA would take over for many existing special-purpose
plans, like the Section 529 College Savings Plan, the Medical Savings Account
and the Coverdell Educational Savings Account.
Retirement Savings Account (RSAs) is a monster IRA. You could put in up to
$7,500 a year and it would grow tax-free, just like a Roth IRA does now. But there
would be no income limitations on contributing, like the Roth has now. You
would not get any deductions for contributing to an RSA. You could convert
assets from existing IRAs into an RSA and pay a one-time tax on the
tax-deferred appreciation, just like you can with a Roth IRA now. There
would not be any required minimum distributions at age 70 ½, like on IRAs
today, and there would be a penalty for early withdrawals before age 58.
Employer Retirement Savings Accounts (ERSAs) are monster 401k’s. These
would replace the 401k, 403b, 457 plans, Simple IRAs and SEPs. You could
contribute up to $12,000 in 2003 -- $14,000 if you are over age 50 -- rising to
$15,000 by 2006. You would get a deduction for contributing and the money
would grow tax-deferred until withdrawn in retirement. There would be
penalties for withdrawal before age 59 ½. The so-called “top-heavy” rules,
which ensure that the top earners in a company don’t take all the benefits,
would be repealed.
The bottom line is that you could contribute up to $30,000 in all three
accounts each year. The plan would greatly simplify a complex web of plans
available today. Most of your money would be growing tax-free, instead of
tax-deferred. Higher-income people would be able to put away a lot more than
they can't do now because of income limitations.
However, it is unlikely that lower-income people would have the money to
contribute to these plans to anywhere near their maximums -- today, very few
even fund a $3,000 Roth IRA when they are eligible. There are real questions
if these simplified plans would end up increasing savings in America or just
have people move around existing money into new tax-free accounts, costing
the government billions in revenue. I think fewer people would contribute
if they don’t get the upfront tax deduction as well. There is also concern
that employers might lower, or even drop, matching contributions in the ERSA,
which would also hurt lower-income workers. And, some worry that without the
top-heavy limitations, the highly paid people in a company would end up with
most or all of the benefits.
Overall, the plans would be a bonanza for the people who could afford to
put the maximum in them and have thousands of dollars growing tax-free. But
for the people who can’t, or don’t, save, they might end up with even less
retirement savings than they have now.
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