NEW YORK (CNN/Money) - President Bush has proposed new tax-free savings vehicles that would let us sock away as much as $15,000 a year. I've been considering investing in an annuity for its tax advantages, but the Bush plan has me re-thinking that idea. What say you?

—Name withheld in New York.

Let's not get ahead of ourselves here. As I've said before, the president's plan to allow investors to put up to $7,500 a year in Lifetime Savings Accounts (LSAs) and another $7,500 in Retirement Savings Accounts (RSAs) that would generate tax-free returns is still just a proposal. A lot can happen on the path from proposal to passed-and-signed legislation, so at this point we don't really know whether this thing will pass or, if it does, how closely it will resemble the president's recommendation.

SIDE BAR Bush plan: the new retirement Money 101: Retirement Getting in on LSAs

If we do eventually get tax-free savings accounts along the lines of those the president has suggested, however, the effects on annuities would likely be profound—though not completely negative as largely portrayed in the financial press. I'll get to those effects in a minute.

In the meantime, though, I think people who are considering investing in an annuity should probably hold off for now until we get a better sense of how all this will play out. I think people who own annuities should sit tight, too. Most carry surrender charges that can dock you as much as 10 percent for withdrawals.

There are also tax implications for pulling your money out of an annuity. So you don't want to make a move now that could prove costly if you want to reverse it later on.

Now, let's talk about the effect the president's tax-free savings proposal would have on annuities. It's true that in some ways tax-free accounts would make annuities less attractive investment vehicles. But I also believe that even if the proposals pass as is, annuities would still be able to play a significant role—indeed, I'd even say a key role—in retirement planning. Here's the skinny.

People buy annuities for two reasons. The most popular one in recent decades has been to earn tax-sheltered returns. When you invest in a fixed annuity, the annuity pays a rate of interest much like a CD, except that as long as your gains remain in the annuity, they go untaxed. The same goes for variable annuities, except that you invest in mutual fund-like subaccounts that can generate income and capital gains.

When you eventually withdraw your money from an annuity, however, Uncle Sam gets his share of the gains. Indeed, those gains, even if they're long-term capital gains, are taxed at ordinary income rates. But the attraction is that as long as your money remains in the annuity, your gains compound without the drag of taxes.

If the president's proposal goes through, I can't imagine nearly as many people buying annuities for this reason. After all, if I can sock away up to $15,000 a year (an amount that will rise with inflation) in an LSA and an RSA and accumulate gains that won't be taxed at all on withdrawal, why would I want to invest in an annuity that only defers the gains?

You could argue that annuities offer other benefits, such as a death benefit that assures your heirs would get at least the amount you invested no matter how badly your accounts perform. But I doubt these other benefits would outweigh the lure of tax-free returns, especially considering the fact that annuities also tend to carry pretty hefty fees and those surrender charges I mentioned earlier.

But here's where things get interesting (well, as interesting as things can get when you're talking about annuities). The second reason people buy annuities is to create an income they can't outlive. You do that via a process that goes by the ungodly name of "annuitization." Essentially, you take a lump sum, say, $100,000 and invest it in a payout annuity (aka an immediate annuity) in return for monthly income that can last for a specific number of years or the rest of your life (or, for that matter, as long as either you or your spouse are alive).

You can buy a fixed payout annuity that gives you a fixed payment that's based on the amount you invest, the current level of interest rates and your life expectancy. Today, for example, a $100,000 payment might buy a 65-year-old man a lifetime payment of about $690 a month.

Or you can opt for a variable payout annuity. In that case, the amount you receive each month would vary according to the performance of the subaccounts you invest in, although if the accounts perform well, your payment should rise over time. (For more on the ins and outs of using annuities to create income, I recommend you check out my Income For Life story that ran last summer in MONEY Magazine.

I believe that this second reason for buying annuities—creating a lifetime income—will become increasingly important in the years ahead as retiring baby boomers are faced with the daunting prospect of turning the balances in their 401(k)s and other accounts into retirement income.

Sure, they can continue to invest their money on their own. But managing withdrawals so you don't run out of money before you run out of time is a tough task, especially given the trend toward longer life expectancies. Investing in one or more payout annuities, on the other hand, can assure that you'll have a regular paycheck coming in no matter how long you live.

Which brings us to the president's proposal. In no way does the proposal for tax-free accounts make this second reason for buying an annuity less appealing. For example, you could invest your fifteen grand or whatever each year in an LSA and an RSA and let your account value build tax-free. Then, when you're ready to call it a career and you would like regular income from your investments to replace your work paycheck, you could take a portion of your tax-free stash and buy a payout annuity.

As long as the annuity remains within the tax-free LSA and/or RSA, the payments it generates are tax free. In short, the annuity becomes a way to convert your tax-free account into a tax-free retirement income that you can't outlive.

The same asset-to-income concept would also apply to balances in your 401(k), or Employer Retirement Savings Account (ERSA), as 401(k)s would be renamed if the president's proposal passes. In that case, of course, the annuity payments would be taxed—as would any withdrawals from the 401(k) or ERSA—since you got a tax break upfront by contributing pre-tax dollars to your account.

Bottom line: the president's plan could make annuities less attractive as wealth accumulation vehicles, but I don't think it would appreciably lower their appeal as vehicles for creating retirement income. Which is fine by me, since I've always felt annuities, despite their tax-deferred returns, have too many other shortcomings that limit their appeal as investments for building wealth. We forget that annuities were originally designed to pay an income, not to shelter investment gains.

So as I see it, the president's proposal could make us focus on what I believe is the real reason people ought to consider annuities—as a way to assure income in retirement.

But as I said earlier, we still have to see how all this plays out amongst our esteemed legislators in Washington, DC. Let's just hope that, with Iraq and North Korea and other matters competing for their attention, we don't have to sit tight too long-- 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.