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148 IRET Congressional Advisory 1 (2003)

handle is hein.taxfoundation/iretcgadv0145 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. February 6, 2003 Advisory No. 148 BUSH SAVING PROPOSALS: TAX REFORM IN THE MAKING? President Bush has unveiled three new proposals to promote saving. They would replace a wide variety of existing personal saving plans and defined contribution pension arrangements offered by employers. More saving would be eligible for the treatments than under current law. The tests and restrictions required for such plans under current law would be greatly simplified and relaxed, reducing legal and compliance costs to enable more companies to offer such plans to their employees. These proposed saving plans are good tax policy, in that they remove one of the layers of tax bias that the income tax imposes against saving relative to consumption. Reducing the tax bias against saving would in turn increase investment, productivity, employment, wages, and income LSAs would advantage for ha toi1 to save separately and emergencies... across the board. Combined with Mr. Bush's earlier saving and investment proposals, the President's new saving initiatives constitute a significant step toward fundamental tax reform. The three simplified saving plans. Lifetime Savings Accounts (LSAs) would allow each person to set aside $7,500 (for 2003, indexed for inflation thereafter) in after-tax money each year, from any source and in addition to any other saving plan. Because the initial contributions would be made out of already-taxed income, the subsequent earnings and withdrawals would be tax free. There would be no income limits on participation, no minimum holding period, and no restrictions on what the money could be used for. LSAs would have a great advantage for low and middle income savers who cannot afford to save separately for retirement and emergencies, such as being laid off, and who are therefore afraid to use ordinary IRAs because of their penalties for early withdrawal. Instead, lower income savers put their saving into ordinary accounts that are subject to the full tax bias against saving, where the saving is taxed each year with no deferral and no exclusion either at the time of deposit or withdrawal. The LSAs would give lower income people who want to save the same access to tax- ye a great neutral saving that higher and middle income workers currently f .11 enjoy. .for retirement Retirement Saving Accounts (RSAs) would resemble current Roth IRAs, but would have a higher contribution limit, $7,500 in after tax contributions (for 2003, indexed for inflation thereafter) per worker per year. The current law $2,000 IRA catch-up contributions for people age 50 or higher would not be allowed, but the new higher RSA limit more than compensates. Contributions could not exceed a single filer's or couple's combined wages. Otherwise, there would be no income limits on participation. Withdrawals could be made penalty-free and tax-free after age 58. RSAs would replace deductible, non-deductible and current Roth IRAs. A deductible IRA and a Roth-type IRA provide identical tax relief for savers who are in the same tax bracket during their working years and after retirement. (If a worker expects to be in a lower tax bracket when retired, the deductible IRA is better. If a worker expects to be in a higher tax bracket when retired, the Roth type is preferable.) I SI 0 I g6~ a . ~ia 1tILUL 111V 11 Vill 3 V Ij LutI ll (JI U

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