Trust Updates Archive
Bush Proposes Radical Reform of Retirement Savings
(Chicago, January 31, 2003)--President Bush is proposing two new retirement savings options which will replace existing IRAs, 401(k) plans, etc. The proposal, in part, would have the effect of rendering interest from savings accounts tax free for most Americans.
The first propsoal creates two new consolidated savings accounts: Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts, (RSAs). Both types of accounts would be available to taxpayers regardless of age or income status. Individuals would also be able to convert existing retirement accounts into these new accounts.
The second proposal creates Employer Retirement Savings Accounts (ERSAs) which are intended to promote and simplify employer sponsored retirement plans. The new plans would consolidate 401(k), SIMPLE 401(k), 403(b), and 457 employer-based defined contribution accounts into a single type of plan that, say Treasury officials, could be more easily established by any employer.
Lifetime Savings Accounts
The new LSA would allow an individual, regardless of age or income, to contribute $7,500 a year (indexed to inflation) and make penalty free withdrawals at any time -- with no holding period. Similar to Roth IRAs, contributions will not be deductible, but earnings will accumulate tax-free, and distributions will be tax free as well. Taxpayers will not be required to document qualified expenses, financial institutions will not need to explain complicated rules to participants, and the government will not need to verify the qualifying expenses.
Prior to January 1, 2004, individuals may convert balances in an Archer Medical Savings Account (MSA), Coverdell Education Savings Account, and Qualified State Tuition Plan to LSAs. Balances in these accounts may not be converted to LSAs after 2003.
Retirement Savings Accounts
Retirement Savings Accounts (RSAs) could be used only for retirement saving. The new RSA would consolidate traditional IRAs, nondeductible IRAs and Roth IRAs into one account with rules similar to those of existing Roth IRAs. Up to $7,500 (in addition to amounts contributed to an LSA) could be contributed to an RSA.
Existing Roth IRAs will be unaffected (except that they will be renamed RSAs). Existing traditional and nondeductible IRAs may 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.
Employer Retirement Savings Accounts
The Bush proposal would consolidate 401(k), thrift, 403(b), and governmental 457 plans as well as SARSEPs and SIMPLE IRAs into a new account, Employer Retirement Savings Accounts (ERSAs), which can be sponsored by any employer.
ERSAs would follow the existing rules for 401(k) plans, but these rules will be greatly simplified, according to Treasury officials. For example, both the definition of compensation and the minimum coverage requirement would be simplified and the top heavy rules would be repealed. Nondiscrimination requirements for ERSA contributions will be satisfied by a single test and many firms may choose to adopt a new designed-based safe harbor to avoid this test altogether.
-- Copyright ©2003 A.M. Publishing, Inc., Trust Regulatory News
No statement in this issue is offered as or