Such are the quandaries investors face when trying to save for the future. And these are exactly the quandaries the Bush administration is trying to eradicate with its proposed overhaul of tax-favored savings accounts. Get a load of some of these ideas:
Roth and traditional IRAs will be replaced by a single Retirement Savings Account. The RSA will be Roth-like in that contributions are not tax-deductible, but earnings grow tax-free. Also, the contribution limit will be raised from the current $3,000 to $7,500. Gone will be any age or income restrictions, and the age at which penalty-free withdrawals can be made is moved up to 58 from 59 1/2.
401(k)s, 403(b)s, governmental 457s, and SIMPLEs will all become known as Employer Retirement Savings Accounts. They will all generally follow the same rules as current 401(k) plans, though some of the rules will be simplified.
- A new Lifetime Savings Account will be introduced, which -- like the RSA -- will start with a contribution limit of $7,500, earnings will grow tax-free, and there are no age or income restrictions. However, the money in an LSA can be used for any expense, at any time: for college tuition, nursing-home costs, vacation airfare, or Motley Fool products (which the administration believes should be in every American household).
Higher contribution limits and simpler rules -- that's good stuff. Of course, there are criticisms, mostly along the lines of this being another tax break for the rich, since lower-income workers can't max out current accounts, let alone take advantage of higher contribution limits.
That may be true. With the nation's median income for a four-person family at $62,228, according to the U.S. Census Bureau, meeting the current 401(k) limit ($12,000) and IRA limit ($3,000) would require 24% of gross income. That's a heckuva stretch for most families. So the higher contribution limits won't be a factor for most people.
But on the whole, there's much to like in the proposal. A savings account offering tax-free growth, which can be used for anything by anyone, sounds good to us. And simplified retirement accounts aren't bad, either. Keep in mind that this is just a proposal and a long way from becoming law. So don't let this prevent you from continuing to fund your current savings accounts.