NCPA - National Center for Policy Analysis

Tax Cuts That Encourage Saving

January 16, 2004

On Tuesday night President Bush will revive the proposal for two new tax-exempt savings accounts in his State of the Union address, says the Wall Street Journal.

Savers are now confronted with six vehicles -- three types of IRAs and three types of specialized education or medical accounts -- each with different requirements and restrictions. Having only two accounts would vastly simplify savings and old accounts could be converted into the new accounts. The new accounts permit greater savings since, combined, they would permit individuals to sock away $15,000 a year -- a number that will be indexed for inflation.

  • The first new account, a lifetime savings account, would allow individuals of any age and any income to contribute up to $7,500 a year and would replace specialized, medical or education savings accounts.
  • Interest and investment income would accumulate tax-free and withdrawals could be made at any time, for any purpose, without a tax penalty.
  • Like current IRAs, withdrawals would not be permitted until a certain age is reached.
  • Interest and investment income would grow tax-free and withdrawals would also be tax-exempt.
  • The new account would more than double the contribution to $7,500 a year, per individual, and has no income caps for eligibility. (Currently, to be eligible for a Roth IRA, joint income cannot exceed $160,000.)

Observers predict the new accounts will increase overall saving by reducing the tax burden on them.

Source: Editorial, "The Next Tax Cut," Wall Street Journal, January 16, 2004.

For NCPA analysis of Bush's saving proposals


Browse more articles on Tax and Spending Issues