NEW YORK (CNN/Money) -
When and how do I sign up for the new Lifetime Savings Accounts President Bush has proposed? I can't wait to invest my first $7,500!
—Kim Bovino, Milford, Conn.
Not so fast. We're talking about a proposal, not a law, at this stage. And in Washington, D.C., lots of strange things can happen as proposals wend their way through the legislative process. So it remains to be seen whether you'll get to invest $7,500 this year in a Lifetime Savings Account, or any other amount for that matter.
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Just in case anyone hasn't been paying attention the past week or so, Lifetime Savings Accounts (or LSAs, as they're already being called) are part of a radical restructuring of tax-advantaged savings plans that President Bush proposed in his State of the Union address. Basically, the proposal would allow anyone, regardless of age or income, to invest up to $7,500 this year in an LSA, while future contribution amounts would rise with inflation. You wouldn't get a tax deduction when you contribute to an LSA, but the earnings would accumulate free of taxes and all withdrawals would be tax free as well. In short, you would earn a tax-free rate of return. That makes the LSA much like today's Roth IRA account, except that you can withdraw your money from an LSA at any time penalty free.
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Besides the LSA, the president's package also includes RSAs (Retirement Savings Accounts), which would also provide a tax-free return and would have a $7,500 contribution limit. These plans, however, would not allow penalty-free withdrawals before retirement age. Bush also seeks to implement ERSAs (Employer Retirement Savings Accounts), which would essentially replace the confusing alphanumeric soup of 401(k)s, 4013(b)s, SARSEPs, SIMPLE IRAs and government 457 plans. ERSAs would be modeled along the lines of current 401(k)s, although the rules governing them would be simplified in many respects. If you'd like specifics on how the various plans work, you can check out CNNMoney's story on the president's new retirement plans. And, if you'd really like to get down to the nitty gritty of these plans, you can check out the Treasury Department's seven-page explanation of the various plans by clicking here.
Frankly, I welcome these changes. I think we can use all the help we can get saving for retirement, so the idea of being able to sock away significant amounts of money and let it build tax free is, to my mind, about as close as one can get to Nirvana (financially speaking, of course). I also like the idea of consolidating that ridiculous hodge-podge of existing retirement accounts into something resembling 401(k)s so we no longer have to sift through separate sets of mind-numbing rules and regulations. (It may also eliminate lots of the questions readers send to me. But that's okay, since we'll all be able to focus on more important matters, like how to invest wisely, rather than how to navigate the rules of salary reduction SEPs.)
But already I see some critics lining up against these accounts with the usual complaints: a) raising the limits and allowing tax-free returns will "cost" the government too much in tax revenues; b) it's unfair to set higher limits because only a small percentage of people will be able to afford to take advantage of them; and, c) allowing people to dip into an LSA any time without penalty will discourage long-term savings. To which I reply: a) yes, the government may get less tax revenue from us, and maybe it will have to be more judicious in its spending or, heaven forbid, spend less; b) we all benefit from higher national savings, so why prevent people who might take advantage of higher limits from doing so; and, c) true, easy access could lead to people dipping into their accounts for short-term needs, but they may also be more willing to put money in the accounts if they know they can get to the money if they really need it.
My advice: if you're really as gung ho about these accounts as you say you are, let your representatives inside the beltway know and, who knows, maybe they'll take your views into account when casting their votes. And if things get to the point where it looks like these accounts are going to become reality, then we can start talking about devising a retirement savings strategy that will allow you to take advantage of the new retirement planning landscape.
-- Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.
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