This Piggy Has Wings

By Jean Chatzky

Now that the shock has worn off--and we've all had a chance to absorb the idea that our trusty old IRAS and 401(k) accounts might be gobbled up by President Bush's radical savings proposals--it's a good time to get prepared by playing "what if." But first, a quick review: Bush wants to shelve dozens of types of tax-deferred accounts, from IRAS and 401(k)s to 529s (for college), and replace them with three much simpler animals:

--ERSAs (employer retirement savings accounts) would be employer-sponsored workplace accounts. Employees could kick in as much as $12,000 a year in pretax money (the best kind) or $14,000 a year if they're age 50 or older. Taxes would be due upon withdrawal, either after age 59 1/2--as with today's 401(k)s--or perhaps earlier.

--RSAs (retirement savings accounts) would replace traditional IRAs. Contributions would not be tax deductible, but limits would be higher. A wage earner could put in after-tax earned income of up to $7,500 a year for herself and a nonworking spouse. Accounts would grow tax free, then withdrawals from age 58 would be tax free.

--LSAs (lifetime savings accounts) would be the most flexible, similar to Roth IRAs but with annual after-tax contributions of up to $7,500 per person a year. Contri-butions wouldn't need to be from earned income, and account holders could withdraw any amount, at any age and for any reason, free of tax and penalty.

Significantly, none of the Bush accounts include mandatory withdrawals or income limits. Democrats have spent most of the past few weeks complaining about that last point--Bush's plan is mighty juicy for the affluent. A single person could sock away nearly $30,000 annually, and a couple twice as much. Add two kids with LSAs in their names and contributions from parents or grandparents, and you're sheltering more than $70,000 a year from future taxes.

Another criticism has come roughly equally from the left and the right: many small employers have in the past set up workplace plans mostly for their own benefit and let employees participate only because the law says they must. Under the Bush plan, a small employer might not set up a workplace plan at all, because he could contribute so much to his own LSA and RSA. Workers could lose out.

As a longtime observer of Americans' saving and investing habits, I hope that any inequities in the Bush proposal are treated by Congress as flaws to be fixed rather than as deal killers. Unlike any previous scheme, Bush's plan has a shot at solving our country's biggest long-term financial problem: about half of us simply don't save. With streamlined tax-deferred options and no-questions-asked LSA withdrawals, Americans might feel they can save without locking up their money for decades. Fears that unrestricted LSAs would lead some undisciplined savers to ruin--they would bleed their accounts for frivolous reasons--may be well founded. But many, many more individuals, I believe, would be inspired to really save.

My Washington sources originally were split about fifty-fifty on whether Bush's plan, or something like it, could become law. Just in the past week they've grown more pessimistic, but most think we will see some elements adopted--if only to give the Treasury a short-term boost. If just half of the $2 trillion now in IRAs is switched into RSAs (which involves paying taxes over four years), federal coffers stand to benefit to the tune of $250 billion.

For a heads-up on how you might best respond, take a look at the accompanying box to see which plan works best for your situation.