Washington (April 5, 2004) -- The proposed Lifetime Savings Accounts Act of 2004 (S. 2263), sponsored by Sen. Craig Thomas, R- Wyo., and its companion bill (H.R. 4078), sponsored by Rep. Sam Johnson, R-Texas, put into motion one-third of the retirement simplification proposals that President George W. Bush introduced last year -- and re-introduced in his budget plans earlier this year.
Individuals could contribute $5,000 a year and withdraw money penalty-free at any time. Although contributions would not be deductible, earnings would accumulate tax-free. Withdrawals would not be taxed either. The accounts require no income or age limits. Contributors would have discretion on how they use the money. Also, existing education savings accounts -- both 529 plans and Coverdell accounts -- could be converted into LSAs.
The bill has been referred to the Senate Finance Committee. A specific hearing date has not been set yet.
The bills have spurred debate over the pros and cons of creating a Lifetime Savings Account option. "It has generated a bit of controversy," said Bill DeReuter, assistant director of government relations for the Financial Planning Association. The FPA supports the LSA proposal.
Opponents said the LSAs bring up a number of potentially damaging issues and deter investors from saving for the long term and in tax-advantaged vehicles -- a theme that the financial industry has been trying to instill, particularly since the bear market. The bill could also become a disincentive for small and midsized employers to even sponsor retirement plans.
"If they don’t save the money, they don’t get the tax benefits, but the insurance people think this competes with annuities and some of the employer plan people feel the same way about it," DeReuter said. "That may have gone into the introducing of these [proposals] separately."
"They’re good for the short-term goals, maybe like college, but I would question how well they would work for long-term goals," said Deborah Voso, of Voso Financial Advisors in Frederick, Md.
If the accounts actually do become reality, planners and executives alike question who would truly benefit from the plans. Higher income individuals have more disposable income to put in these accounts, while rank-and-file workers might not be able to afford it.
"When it comes to the LSA, we’re quite concerned," said Chris Bowman, vice president of retirement and investor services at Principal Financial Group. The Des Moines, Iowa, company would offer the plan, since the bill states that annuity plans would be an allowable funding vehicle for the LSAs. (Ironically, the bill specifically notes that the money shall not be invested in life insurance policies.)
"On the surface, for planners it might seem an exciting idea because it’s another new financial tool," but in when assessing the long-term benefits, they might see a different answer, Bowman said.
Aside from savings issues, Bowman added that the accounts could result in revenues lost to the nation. "In qualified plans, the taxes that are applied to those programs are just deferred, whereas the LSA offers a tax forgiveness," he said. "With the deficit increasing we certainly have to be concerned about that."
It’s expected that Thomas and Johnson will introduce the other two retirement proposals, the Retirement Savings Account and Employer Retirement Savings Accounts, at later dates.
As for whether the LSA will become law this year – it’s not likely. The general controversy over the account, combined with an election year, is a recipe perfect for Congress to put the bill on hold until at least after November.
-- Laurie Kulikowski, Financial Planning.com
