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Retirement Plans For The Self-Employed
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Article 7: Lifetime Savings Accounts
Legislation is pending in Washington that would create another new category of savings suitable for retirement planning: Lifetime Savings Accounts (LSA).
These accounts are based on a proposal by the Bush administration to encourage savings and to simplify current retirement plan laws. For the self-employed, the accounts would add another attractive retirement savings option.
The rules for Lifetime Savings Accounts are similar to existing traditional IRAs and Roth IRAs. They would permit annual non-deductible contributions, adjusted for annual cost-of-living increases. The legislation also has no age or income eligibility requirements, and distributions would be available any time, free of income taxes and penalties.
The idea is that the money invested in the accounts already has been taxed once as income, so it is exempted from future taxes when withdrawn. If passed, some believe the simplified defined contribution plan may signal a sweeping reform of retirement law.
Under LSAs, people could contribute up to $5,000 a year and withdraw money at any time penalty free. The money earned on the after-tax contributions made to an LSA also would be tax free. There also would be no limitations on how withdrawals could be used, and no limitations on income or age for those contributing.
Unlike some other retirement plans, contributions would not be tax deductible. They would be made with after-tax, not pre-tax dollars. The legislation would permit existing education savings accounts to be converted into the new Lifetime Savings Accounts.
LSAs are expected to appeal particularly to people who currently are not saving for retirement at all. The attraction for non-savers lies in not being taxed twice on the same money, and not facing distribution penalties regardless of when or for what purpose the money is withdrawn. In that sense, the LSAs resemble the “front-loaded” Roth IRAs in which contributions are made with post-tax cash and withdrawals are not taxed.
These savings incentives provide in effect a lifetime tax subsidy even at low earning levels. The Lifetime Savings Accounts are expected to work better as saving incentives than 401(k) plans and traditional IRAs. They also don’t have the drawback of Roth IRAs’ more complex regulations.
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