proposal would change the way we think about investing.
Lifetime Savings Accounts
The Bush administration has proposed new, tax-free investment accounts
called Lifetime Savings Accounts, or LSAs. These accounts offer everything
an investor could desire: generous contribution amounts, no income limits,
and complete freedom to use the money however and whenever the owner wishes,
without tax or penalty. If the proposal becomes law, it will change the way
we think about investing.
Individuals would be permitted to contribute up to $7,500
per year to these accounts. The account owner does not need to have
earnings, and there is no income limit. You simply need to have money and a
willingness to contribute.
What are the qualified uses? Anything. You can use
this account to save for a home, or for your children's education, or
accumulate money to start a business. There are no restrictions on the use
of the money. The only penalty for taking the money out is that it is no
longer in the account accumulating tax-free earnings.
Favoring the Rich?
Inevitably, some will object that this proposal favors wealthy taxpayers,
because they have more money to invest in such accounts. Yet there is
another way of looking at it. Middle-class taxpayers with modest savings
will be able to put all their savings in their LSAs. The $7,500
annual contribution limit will not be a meaningful restriction for them. By
contrast, a millionaire would be able to contribute less than 1% of her
wealth each year. In effect, these accounts would repeal the tax on
investment earnings for taxpayers other than those who have a great
deal of wealth.
Look for this proposal to set off a feeding frenzy among brokers, mutual
funds and other financial institutions as they vie for your investment
dollars. To kick things off with a bang, the proposal would allow owners of
other tax-favored, non-retirement investment accounts to convert those
accounts to LSAs. All those billions sitting in 529 plans will be targeted,
as will the lesser amounts in Coverdell education savings accounts and
Archer medical savings accounts.
What About Retirement
The proposal would also revamp IRAs. In fact, traditional IRAs would be
phased out, with no more contributions permitted after 2003. Roth IRAs would
become Retirement Savings Accounts (RSAs), with a contribution limit of
$7,500, just like LSAs. Also like LSAs, RSAs will have no income limits.
There are two important differences, however: you must have earnings to
contribute, and you'll pay tax on earnings if you take withdrawals before
age 58 (that's right, 58).
You have enough money to contribute to both? No problem.
You're allowed to contribute $7,500 to your LSA and contribute $7,500
to your RSA for the same year.
The proposal includes drastic (and long overdue)
simplification of employer plans, too. The overall effect would be to make
it simpler and less costly for small companies to establish and maintain 401k-style
A Different World
Imagine never again worrying about capital gains and losses. Wash sale rule?
Down the drain. So what if your mutual fund makes one of those ugly taxable
distributions right after you invested. In your Lifetime Savings Account, that distribution is
It's too early to tell if this proposal has legs. Yet it
isn't too early to say this: if it becomes law, investing will be a very
different game indeed.
by Kaye Thomas
January 31, 2003
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