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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the definition of compensation and the minimum coverage requirement will be simplified and the top heavy rules will be repealed.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.


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