Personal Financial Planning

The Bush administration’s FY2008 budget proposal includes several measures intended to simplify and encourage retirement savings. A Retirement Savings Account would consolidate the current three types of individual retirement accounts (IRAs) and eliminate qualified purposes for early withdrawals. It would restrict annual contributions, which must be made in cash, to the lesser of $5,000 or earnings included in income; there would be no income limits. Contributions would be nondeductible, but distributions made after age 58 or in the event of death or disability would be tax-free, as with current-law Roth IRAs. Also, there would be no minimum-distribution requirement. Existing Roth IRAs would automatically convert to RSAs, whereas traditional IRAs could be converted by taking the conversion amount into gross income, as is currently done for Roth conversions (but no income limit would apply to RSA conversions).

A separate Lifetime Savings Account could be used for any purpose, including health care, emergencies and education, as well as for retirement, consolidating several types of tax-favored “special-purpose savings vehicles”: Health Savings Accounts, Archer Medical Savings Accounts, Coverdale Education Savings Accounts and section 529 Qualified Tuition Programs. An LSA would have a $2,000-a-year contribution limit regardless of earned income level; contributions must be in cash. LSA distributions also would be tax-free, regardless of the account-holder’s age or use of the distribution, although contributions would be nondeductible.

Likewise, the administration would consolidate the panoply of employer-sponsored retirement plans into an Employer Retirement Savings Account for all employers.