New Accounts Would Allow Tax-Free Withdrawals
November 5, 2003
The Bush administration is working on a proposal to simplify tax-advantaged savings account and remove limits on eligibility, reports the Wall Street Journal.
Both new accounts would work like Roth IRAs (Individual Retirement Accounts): contributions wouldn't be deductible, but interest and investment income would build up tax-free and wouldn't be taxed on withdrawal.
- A more flexible "lifetime savings accounts" would allow individuals to save after-tax dollars and withdraw money tax-free at any time, for any purpose -- from buying a house to paying phone bills -- without penalty, unlike IRAs.
- Money couldn't be withdrawn until some set age from a second type of account, for retirement savings, that is intended to replace current IRAs.
- Together these would allow each family member to sock away up to $15,000 a year; but unlike current IRAs there would be no income caps; for instance, married couples with adjusted gross incomes of more than $160,000 don't qualify for Roth IRAs.
- Contributions to existing IRAs, in which Americans have stashed $2.3 trillion, as well as funds now in educational and medical savings accounts, would be capped, and new deposits would be directed into the two new accounts.
- The new accounts wouldn't directly affect the estimated $2.2 trillion Americans are holding in defined-contribution retirement plans such as employer-sponsored 401(k)s.
- Less than 4 percent of workers who make $40,000 to $80,000 contributed the maximum amount to their IRAs in 1997, the latest year available.
- Another change being discussed is to expand government matches for low-income savers in the new plans.
With additional tax breaks the administration is considering, the package could cost $50 billion in tax revenue over the first 10 years.
Source: Bob Davis and John D. Mckinnon, "Two Big Tax-Free Savings Plans To Get New Push by White House," Wall Street Journal, November 5, 2003.
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