Dateline: 02/06/03

President Bush's FY 2004 budget proposal includes two programs designed to help Americans save and prepare for retirement -- tax-free.

The first proposed program creates two new consolidated tax-free savings accounts: Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts, (RSAs) that will allow everyone to contribute -- with no limitations based on age or income status. In addition, existing conventional savings accounts can be converted into LSAs and RSAs.

"These bold new accounts will give more hardworking Americans the chance to save so they can enrich their lives and strengthen their retirement security," stated Treasury Assistant Secretary for Tax Policy Pam Olson. "They make saving simple for everyone and for every purpose. No longer will individuals have to worry about the confusing alphabet soup of six different savings accounts. No longer will people have to worry about the endless maze of confusing rules. The two simple accounts will have one powerful goal -- making saving for everyday life and retirement security easier and more attractive."

The second proposal creates Employer Retirement Savings Accounts (ERSAs) to promote employer sponsored retirement plans by consolidating 401(k), SIMPLE 401(k), 403(b), and 457 employer-based defined contribution accounts into a single type of plan that can be more easily established by any employer.

Lifetime Savings Accounts
Savings from Lifetime Savings Accounts (LSAs) could be used for any expense, including education, healthcare, new homes, of for starting new businesses. Persons of any age or income could contribute up to $7,500 a year to their LSA and make penalty free withdrawals at any time -- with no holding period. Like current law Roth IRAs, contributions would not be deductible but earnings and distributions would be tax-free. The $7,500 contribution limit would be indexed for inflation in future years.

According to the White House, LSA's offer Americans the following advantages:

• They can simply save more tax free.

• More low and moderate-income taxpayers will participate. Many do not participate now because they are more likely to face a penalty if they need the funds. Knowing they can access the money at anytime for any purpose will encourage them to set money aside and allow them to receive tax-free earnings from their first dollar of savings..

• It takes away the hassle factor. The combination of universal eligibility and unrestricted tax-free withdrawals greatly simplifies the whole process, making it more likely that average taxpayers will participate, especially inexperienced savers. Many low- and moderate-income taxpayers will conveniently be able to put all their financial assets in one place; this will greatly simplify their taxes because they will no longer receive taxable investment earnings.

Retirement Savings Accounts
Retirement Savings Accounts (RSAs) could be used only to build up retirement savings. RSAs would consolidate traditional IRAs, nondeductible IRAs and Roth IRAs, each of which has a different set of rules regarding eligibility and tax treatment, into one streamlined type of account with rules similar to current law Roth IRAs. Up to $7,500 (in addition to amounts contributed to an LSA) could be contributed to an RSA annually. While contributions to RSAs would not be deductible, earnings would accumulate tax free and distributions after age 58 (or death or disability) would be tax free.

Existing Roth IRAs would be unaffected. Existing traditional and nondeductible IRAs could be converted into RSAs; those not converted to RSAs could not accept any new contributions (other than rollover contributions); no one would be required to convert.

As with LSAs, the $7,500 contribution limit would be indexed for inflation in future years.

The White House says RSAs would be good for average Americans because:

• More Americans will save for retirement. Repeal of the income limits will eliminate the confusion and complexity associated with determining eligibility and will encourage participation.

• It makes saving for retirement simple and easy. Individuals will not be required to make minimum distributions from the accounts during their lifetime, simplifying financial planning in retirement.

• More will be set aside for retirement. Current IRAs allow for withdrawals for many non-retirement purposes. Each withdrawal from an IRA potentially reduces retirement funds. Having a separate retirement account will help individuals plan for both non-retirement and retirement needs.

Employer Retirement Savings Accounts
There would be multiple tax-preferred, employer-based retirement savings accounts with similar goals but different rules regulating eligibility, contribution limits, tax treatment, and withdrawal restrictions. The Bush budget proposal would consolidate 401(k), thrift, 403(b), and governmental 457 plans as well as SARSEPs and SIMPLE IRAs into a simpler account, Employer Retirement Savings Accounts (ERSAs), which could be sponsored by any employer.

Assistant Secretary Olson stated, "The overwhelming complexity of current rules imposes substantial burdens on employers and workers. Because employer sponsorship of a retirement plan is voluntary, this complexity discourages many employers from offering any plan at all. This is especially true of small employers who together employ about 4 out of every 10 American workers. It's one important reason why only 50% of working Americans have any pension plan at all. I'm confident that simpler rules will encourage employers to create new plans for their employees because creating a qualified plan will be much easier."

The White House says ERSAs would be good for workers because:

• Coverage and participation will increase because firms that are not currently offering retirement plans because of the complexity and compliance costs will be more likely to offer such plans under the proposal.

• More small businesses will be able to cover more workers. The reduction in red tape will remove a barrier that discourages small business owners from offering this benefit to their employees. Small businesses employ about two-fifths of American workers, but the pension coverage rate has consistently remained under 25 percent among employees of small firms.

• Employees will benefit because firms currently offering employer plans will have reduced compliance costs.

The White House also released an extensive set of common Questions and Answers regarding President Bush's LSA/RSA and ERSA Proposals.

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