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- ICI Comment Letters
President’s Proposal Would Create New Savings Opportunities
Washington, DC, January 31, 2003 - The Institute strongly supports provisions of the Bush Administration’s FY 2004 budget proposal that call for the creation of three new savings vehicles: Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and Employer Retirement Savings Accounts (ERSAs).
Lifetime Savings Accounts
LSAs are individual savings accounts that could be used for any type of saving. In many respects, LSAs would be taxed like Roth IRAs. Individuals, regardless of age or income, could make nondeductible contributions to an LSA of up to $7,500 per year (indexed for inflation), even if they have no wage income. No tax would be imposed on either earnings in an LSA or on distributions from an LSA and penalty-free withdrawals could be made at any time. Also, LSAs would not be subject to a required minimum distribution requirement during the individual’s life.
Retirement Savings Accounts
RSAs are individual accounts that can be used only for retirement savings. The RSA would effectively consolidate traditional IRAs, nondeductible IRAs, and Roth IRAs into a single account, which would be subject to rules similar to the rules currently applicable to Roth IRAs. RSAs would not be subject to income limits or required minimum distribution requirements.
Individuals, regardless of age or income, would be able to make nondeductible contributions to an RSA of up to $7,500 per year (indexed for inflation) in addition to contributions to an LSA. A married couple filing jointly could contribute up to $7,500 for each spouse to an RSA No tax would be imposed on either earnings in an RSA or on qualified distributions from an RSA after age 58 (or death or disability).
Employer Retirement Savings Accounts
The President’s proposal would consolidate 401(k), Thrift, 403(b), and governmental 457 plans, SAR-SEPs, and SIMPLE IRAs into a single employer-sponsored account called an Employer Retirement Savings Accounts (ERSA), which could be sponsored by any employer. Beginning in 2004, all 401(k) plans would become ERSAs. SIMPLE IRAs, SAR-SEPs, 403(b) plans, and governmental 457 plans could continue in existence indefinitely, but could not accept any future contributions after 2004. ERSAs would be subject to simplified versions of the existing rules applicable to 401(k) plans.
An employee would be able to defer in an ERSA up to $12,000 (increasing to $15,000 in 2006) plus, once the employee reaches age 50, a catch-up contribution of $2,000 (increasing to $5,000 in 2006). After-tax contributions would be permitted to an ERSA, and accounts attributable to such contributions made after 2003 would be treated much like the new RSAs. Distributions from ERSAs would generally be tax-exempt and the accounts would not be subject to the required minimum distribution rules until after the death of the participant.