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Congress weighs new investment accounts: 4 ways to prepare

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in Small Business Tax

President Bush is once again pushing Congress to radically reshape America's savings plan system, creating three new tax-preferred investment accounts.

Will his plan pass in 2004? With an election on tap, odds are below 50-50. But it pays to be prepared, so keep your eye on the bouncing legislation. Still, you won't have to delay your retirement planning for all of 2004. By summer, these proposals will either have strong momentum or, as it's appearing now, be shelved until 2005.

Here are the proposed new accounts in President Bush's plan:

Lifetime savings accounts (LSAs). They would be available to everyone, regardless of age or income. You would contribute up to $5,000 per year. While you couldn't deduct the contributions, all investment earnings and withdrawals would be tax-free.

Retirement savings accounts (RSAs). The rules would be similar to those for LSAs, but you'd have to wait until age 58 to make tax-free withdrawals.

Employer retirement savings account (ERSAs). These would be employer-sponsored plans, and they'd replace 401(k)s, SIMPLEs and other such plans. Ideally, one simplified plan with uniform rules would replace several, more complicated plans.

The president wants to create a "custodial ERSA," similar to today's IRAs, for employers with 10 or fewer employees. The goal: Help reduce costs to small businesses and encourage them to offer retirement plans.

On the possibility that these three accounts (or something like them) will be passed, you should wait before taking certain actions, specifically:

1. Don't make any expensive moves relating to your company's retirement plan. Don't spend huge dollars on legal fees, consulting, etc., to set up a new retirement plan until you see if ERSAs have a chance at passage. Similarly, don't make costly changes to the retirement plan you now sponsor.

2. Don't pour money into tax-deferred or tax-free investment vehicles such as deferred annuities and cash-value life insurance policies. If LSAs are passed, you'll want to fund them fully before putting any money into a fixed or variable annuity. As for life insurance, you'd be better off buying a term insurance policy, which charges lower premiums. The money you save can be invested in LSAs.

3. Use separate accounts for 2003 IRAs. RSAs would replace traditional IRAs and Roth IRAs. Money you contribute to a traditional IRA or a Roth IRA for 2003 can be rolled into an RSA, but the process would be a lot simpler if you create a new IRA or Roth IRA for your 2003 contribution. Then, that entire new account could be rolled into an RSA.

4. Be cautious about Section 529 contributions. These tax-free college savings accounts would continue to exist under proposed legislation, but they may be less attractive than LSAs. Although Congress would likely allow 529 plans to be rolled over into LSAs, some 529 plans impose a penalty or fee for early withdrawals. Try to avoid 529 plans that impose such fees.

Online resource:


For details on RSAs, LSAs and ERSAs ...


... Read the Treasury Department's announcement at www.treas.gov/press/releases/js1131.htm.

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