President Bush Proposes Replacing IRAs, 401(k)s

President Bush presented his fiscal year 2004 budget this week. Among other proposals, the President is calling on Congress to create two new types of retirement accounts which would simplify and streamline the current collection of retirement options, including IRAs, Roth IRAs, 401(k)s, 456s, SIMPLEs, and more.

The President's plan calls for the establishment of Retirement Savings Accounts (RSAs) which would replace the current Individual Retirement Arrangements (IRAs). The plan also calls for the establishment of Lifetime Savings Accounts (LSAs). The President calls for these accounts to become effective in 2003, however Treasury Assistant Secretary Pamela Olson indicated that it may be 2004 before the plans could be implemented if passage in Congress does not occur before July, 2003.

Lifetime Savings Account

Taxpayers would be entitled to contribute up to $7,500 per year into a Lifetime Savings Account with no income ceilings to discourage investment. The annual contribution limit would be indexed for inflation. Like the Roth IRA, contributions would be non-deductible but all earnings in the account would accumulate tax-free and all withdrawals from the account would be tax-free.

Withdrawals from LSAs could be made at any time and used for any purpose without restriction.

Retirement Savings Account

In addition, taxpayers would be entitled to contribute up to $7,500 per year (indexed for inflation) into a Retirement Savings Account, again with no income ceilings to discourage contributions. Contributions would be non-deductible and earnings would accumulate tax-free. All withdrawals from the account would be tax-free. Qualified distributions would begin after age 58 with no minimum distribution amounts. Early distributions would be subject to income tax and penalty.

Taxpayers would be able to convert amounts currently in IRAs, Archer Medical Savings Accounts (MSAs), Coverdell Education Savings Accounts (ESAs), and Qualified State Tuition Plans (QSTPs) to LSAs. Existing Roth IRAs would be renamed RSAs with no tax ramifications. Amounts in traditional IRAs would be eligible for conversion to RSAs with no income limit hindering the ability to make the conversion. To the extent that amounts residing in IRAs are taxable, those amounts would be taxed at regular income tax rates in the year of conversion. Taxpayers who choose to convert funds prior to January 1, 2004 would be allowed to distribute the tax on the conversion over a four-year period.

Employer Retirement Savings Account

The President's plan also calls for the establishment of Employer Retirement Savings Accounts (ERSAs) that would consolidate the current 401(k), SIMPLE 401(k), Thrift 403(b), Government 457, SIMPLE IRA, and SARSEP plans. ERSAs would follow the same rules as the current 401(k) arrangements.

Employees would be able to contribute up to $12,000 per year (scheduled to increase to $15,000 by 2006). Catch-up provisions apply to employees over age 50. Employers would also be able to make contributions to the extent that the total annual contribution by or on behalf of an employee does not exceed the lesser of $40,000 or 100 percent of compensation. Contributions could be either pre-tax or after-tax, depending on the design of the plan.

You can read the complete text of the President's fiscal year 2004 revenue proposals, and a more in-depth explanation from CCH.

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