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Here's an approach that IMHO is long overdue. The problem will be in the implementing legislation. Therefore, before supporting this effort that's what I, for one, want to see.

http://www.401khelpcenter.com/press/pr_treasury_013103.html

Regards to all...Pixy
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If I understood what I read correctly, one will be able to invest after tax money in a Lifetime Savings Account LSA, up to $7,500 per year and have that account grow tax free like a Roth IRA. However, they are also free to withdraw from the account tax free at any time for any purpose regardless of their age. As long as one doesn't invest more than $7,500 per year why would not all brokerage accounts be replaced by an LSA account to avoid all capital gain and dividend taxes? Then again, if capital gains and dividend taxes are eliminated, what would be the purpose of having such "retirement" accounts anyway?

What am I missing here???

Jim Sullivan aka 8128
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Jim Sullivan asks:

What am I missing here???

The enabling legislation if and when it gets written in the House and Senate Committees. Don't hold your breath on this one. A lot happens between the time something is proposed and the time legislation is enacted (assuming it ever would be).

Regards...Pixy
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Great for my wife and I!! BAD for my wife's parents. Pretty much their only tax deduction was traditional IRA contributions. Although, they'll qualify for the Saver's Credit, which is good.

It certainly puts a different spin on my retirement savings plans :)

-Warthog


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Don't hold your breath on this one.

'tis true.
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Something else I just thought of, though I'm not sure if it would be good or bad (or indifferent)...

How would this affect Municiple Bonds? One of their strongest selling points is that they are usually tax free. Will they be forced to raise their rates? If that happens, do muni bond funds NAV's start to drop?

-Warthog
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President's Proposes Replacing 401k Plans
Treasury Department announced on January 31, 2003 that the President's budget will include several new expanded savings proposals including the replacement of 401k accounts with Employer Retirement Savings Accounts (ERSAs). ERSAs are intended to promote and vastly simplify 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.

"Employer Retirement Savings Accounts - ERSA

The Budget proposal will consolidate 401(k), thrift, 403(b), and governmental 457 plans as well as SARSEPs and SIMPLE IRAs into a streamlined and simpler account, Employer Retirement Savings Accounts (ERSAs), which can be sponsored by any employer.

ERSAs will follow the existing rules for 401(k) plans, but these rules will be greatly simplified. For example, both the definition of compensation and the minimum coverage requirement will be simplified and the top heavy rules will 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.

Also included in President Bush's proposal are two new consolidated 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

Lifetime Savings Accounts

Lifetime Savings Accounts (LSAs) can be used for any type of saving. LSAs will help millions of Americans save in one tax favored account for any purpose, including their children's education, a new home, healthcare needs, or to start their own business. The new LSA will allow an individual, regardless of age or income, to contribute $7,500 a year and make penalty free withdrawals at any time -- with no holding period. Like current law Roth IRAs, contributions will not be deductible but earnings will accumulate tax-free, and distributions will be tax free as well.

The $7,500 contribution limit will be indexed for inflation in future years.

Retirement Savings Accounts

Retirement Savings Accounts (RSAs) can be used only for retirement saving. The new RSA will . . . streamline type[s] of accounts 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. Like current law Roth IRAs, contributions will not be deductible but earnings will accumulate tax free and distributions after age 58 (or death or disability) will be tax free.

<<<JAFO: Will SEPP withdrawals still be allowed?>>>

Existing Roth IRAs will be unaffected (except that they will be renamed RSAs). Existing traditional and nondeductible IRAs may be converted into RSAs <<<JAFO:triggering a taxable event>>>; those not converted to RSAs could not accept any new contributions (other than rollover contributions); no one would be required to convert.

The $7,500 contribution limit will be indexed for inflation in future years."

$15,000 for LSA/RSA not tax deductible. How many people can afford anywhere near that amount, especially without beneift of a current deduction? Also seems odd that a Republican administration wants to encourage growth in current federal revenue. Very slick.

Also real curious about SEPPs.

JAFO

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Also real curious about SEPPs.

Yeah, SEPP's on the new RSAs and SEPP's on existing IRAs that you don't convert. Also, what happens to ERSA's (the 401k replacement) when you change jobs? What do you roll those into?

Hyperborea
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I don't beleive this will reduce compliance costs a great deal. All it really does here is allow the Highly paids to put more money away because the Discrimination rules will be almost impossible to fail, and top heavy rules are being repealed. This should encourage more small business owners to start a plan, but I don't see all the recordkeepers out there lowering fees because some one will still have to draft a plan document specifiying eligibility for the plan, vesting schedules, Loan ammortizations, Revised discrimination tests, minimum coverage testing, Summary plan descriptions, IRS Form 5500s, process distributions, withhold and deposit tax, issue form 1099s, and Form 945s, Keep track of elective deferrals (402g limit and overall 415 limits)
These amendments do nothing to encourage lower paid workers to participate, just make it easier for the Highly paids to put more into the plan. Also the Safe harbor rules are relaxed which actually hurts the lower paid worker, current safe harbor match requirement is a formula equal to 4% of pay, new formula lowers the threshold th 3% on the safe harbor match.
Overall, should make things easier to understand, but don't expect huge cost savings because of this. I saw no mention of this repealig ERISA, DOL, or IRC regulations.
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W401K writes,

These amendments do nothing to encourage lower paid workers to participate, just make it easier for the Highly paids to put more into the plan.

I agree. This has about the same chance of passing as the dividend tax cut.

I saw a news story today that said that only 4% of workers are currently fully-funding their IRAs and 401ks. Raising the limits only helps this select group.

intercst
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I saw a news story today that said that only 4% of workers are currently fully-funding their IRAs and 401ks. Raising the limits only helps this select group.

We only fund the 401Ks to the point of the maximum match and don't qualify for a Roth. I don't think it's to our advantage to fund more than that. At that level, we save 12% of my husband's salary and 15% of mine each year and have done it since our early 20s(we're 48 & 51 now). We have some IRA money from when they were deductible. If we're in the 96% not "fully funding", oh well. I suspect we're in better shape for retirement than much of the population. And we both enjoy our work. We'll retire when that stops.

rad
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Here's an approach that IMHO is long overdue.

I guess that would depend on how you are affected. For a person with a 401k and a 457 plan, that person would lose the extra retirement savings by being limited to one retirement account instead of the current two.

moiless
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