Posted on 01/02/2004 9:51:27 AM PST by Grampa Dave
http://personal.fidelity.com/myfidelity/daily/index.shtml
Legislative Outlook: Reforms May Let You Save More
A Look at What's Ahead in Washington for 2004
Published: January 02, 2004
By Doug Fisher, senior vice president of Fidelity Government Relations
Later this month, President Bush will present the State of the Union and follow with a budget highlighting his priorities for 2004. Among his possible agenda items are simplified savings laws allowing taxpayers to put aside more tax-free savings to pay for retirement, health care, education, and even home purchases.
The president unveiled these concepts in last year's budget, but he and Congress focused instead on cutting the dividend and capital gains tax rates. Now that the tax cuts have become law, savings reforms could be included in a new budget and become a prominent piece of the Bush Administration's agenda over the next 12 months.
These reforms seek to reduce taxes on savings and investments and to create new flexible savings accounts. Their goal is to make it easier and more attractive for taxpayers to save and invest. Though details of these proposals could change, here's a look at what we know now.
Increasing the power of individual savings New Retirement Savings Accounts (RSAs) would replace existing tax-deductible Individual Retirement Accounts (IRAs) and Roth IRAs. RSAs would consolidate tax-free earnings into a single savings vehicle that taxpayers would fund with after-tax dollars. Earnings in RSAs would grow tax-free, and assets would be withdrawn tax-free upon retirement.
Currently, single taxpayers who earn more than $95,000 a year and couples filing joint tax returns who earn more than $150,000 a year don't qualify for Roth IRAs. But the reforms would eliminate existing income restrictions that disqualify people from contributing to a Roth or from making tax-deductible contributions to a Traditional IRA. In essence, RSAs would make the benefits of Roth IRAs available to all taxpayers.
Helping taxpayers save for basic needs New Lifetime Savings Accounts (LSAs) would give all individuals a way to save for expenses such as health care, college, or buying a home. Like RSAs, these accounts would be funded with after-tax dollars; their earnings would grow tax-free, and their assets would be tax-free upon withdrawal for any purpose.
Simplifying employer savings plans Existing employer-sponsored retirement accounts (including 401(k)s, 403(b)s, 457s, SIMPLE-IRAs, and SEP-IRAs) would be consolidated into a single new vehicle known as Employer Retirement Savings Accounts (ERSAs).
ERSAs would operate much like today's 401(k) and carry the same contribution limits, but they would have simpler administrative rules. Unlike existing employer-sponsored 401(k) plans, ERSAs would allow employees to use after-tax dollars to make their contributions, and earnings would be tax-free upon withdrawal.
Higher contribution limits We expect the proposal to call for a contribution limit of $5,000 for both RSAs and LSAs. Taxpayers could also contribute up to $5,000 a year in an LSA for other individuals, such as a spouse or child, regardless of income.
Expect changes Because Congress is so closely divided, expect plenty of debate—and changes—as a proposal is vetted over the next couple of years. However, a number of modifications may help build bipartisan support.
For example, expanding the "Savers Credit" (which currently calls for the government to match a portion of the savings put aside by low-income families) and depositing the credit directly into RSAs and ERSAs. This idea has been described as creating a universal savings account for all taxpayers. Other possible changes could include the creation of a president's council on "financial fitness" that would encourage families to save more.
Pros and cons Besides raising contribution limits and simplifying savings vehicles, these proposals would give taxpayers greater flexibility in how they save, manage, and spend their tax-advantaged savings. Furthermore, ERSAs would make it easier for employees to transfer workplace retirement savings if they change jobs. As a universal workplace retirement plan, ERSAs would also provide consistent and understandable distribution rules and may lower administration costs.
However, some argue that the government could lose billions in tax revenues over the next 10 to 20 years if the reforms are passed, because earnings in RSAs and LSAs would be withdrawn tax-free at retirement. Others say the cost would be negligible, since the new accounts would be funded with after-tax dollars and would replace existing tax-deductible IRAs.
What should savers do now? It's uncertain whether the Bush Administration can push these reforms through Congress in an election year, so investors should continue to maximize what they put into existing savings vehicles. Although the legislative environment is uncertain, we're staying abreast of the developments and will keep you informed as the president details his budget and lays out his agenda.
(Doug Fisher is senior vice president of Fidelity Government Relations. E-mail any questions or comments to Investor's Weekly at Investors.Weekly@fmr.com.)
Oh, I have no problem with the politicians supporting me in a lavish lifestyle. It's the rest of you spongin' cretins that gets my goat! ;-)
Sounds like a large dose of RAT poison, to me.
Can't wait till they trot out the tired "It's only for the rich" attack formula on this one. I'd be willing to bet that at least 60% of Americans don't listen to that bilge anymore.
60% wins elections unless a whole lot of dead rats, illegal aliens and double dipping voters vote.
Outrageous! ;-)
Thanks for the ping and Happy New Year, Grampa!
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