But doubts remain about whether Bush's proposals will be adopted.
President Bush's proposal to shake up the retirement savings arena with new tax-advantaged savings plans remains on the agenda this year-included in the budget proposal the president has sent to Congress.
But questions remain about whether Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) and Employer Retirement Savings Accounts (ERSAs) will actually replace the IRAs, 401(k) and 403(b) plans that investors and advisors have been accustomed to using for decades.
What's happened with the proposals to this point has left even proponents pessimistic. Designed to streamline and expand opportunities for personal retirement savings, the proposals languished last year under heavy opposition. The Bush administration has made some inroads in building support this year, but some still wonder how hard the White House is willing to push for passage in 2004.
Many in Washington feel it's virtually impossible for the legislation to get pushed through in a presidential election year, especially at a time of heightened concern about the federal budget deficit. That's why some are looking toward 2005 as a more realistic target for the proposals to move forward, particularly after President Bush failed to include them among a laundry list of initiatives he outlined in his State of the Union speech.
"I stayed up watching the State of the Union hoping to hear him say something," says Gordon Bernhardt, chair of the Financial Planning Association (FPA) Tax Subcommittee. The FPA has been one of the proponents of the proposals, saying they would expand opportunities for Americans to save for retirement. "You have to wonder just what will happen when push comes to shove," says Bernhardt. "Who knows?"
This is particularly true with the federal deficit ballooning to more than $500 billion in President Bush's budget proposal. While the elimination of tax-deductible IRAs will create a short-term revenue gain for the federal government, the long-term trend will be a steady loss in tax revenue because, theoretically, there will be a marked rise in tax-free retirement accounts. That has observers taking an even dimmer view of any changes for this year, as well as concern about whether or not LSAs and RSAs will actually remain untouched by taxes down the road.
Some modifications have been made to the proposals since last year, but their basic form remains the same: They would establish new, more flexible retirement savings plans.
The ERSA would represent a sweeping change, replacing most forms of employment-based retirement vehicles, including 401(k), 403(b), governmental 457 plans and SARSEPs. The ERSAs are designed to simplify nondiscrimination-testing rules, as well as allowing employees to contribute on an after-tax basis.
The two other components of the plan, RSAs and LSAs, allow for contributions of up to $5,000 per year each and would function similarly to Roth IRAs. Unlike traditional IRAs and Roth IRAs, these two vehicles would have no compensation limit. Nor would there be any limits on the age at which investors can make contributions. LSAs would be more flexible, allowing withdrawals for a multitude of reasons without any penalties and carrying no income limitations. Contributions to LSAs could come from any source, and would not be limited to earned income. Traditional IRAs would be eliminated and replaced by RSAs, although existing IRA accounts could be preserved without any further contributions.
What changes in the proposal can be expected form last year?