Administration Proposals to Change Retirement
and Savings Programs
William Sweetnam, Benefits Tax Counsel, Department of the Treasury

The Bush Administration hopes to simplify American’s choices for savings—for health care, education or and retirement—with the new programs recently unveiled, according to Treasury’s Benefits Tax Counsel Bill Sweetnam. A frequent participant in NCPERS’s legislative conferences, Sweetnam has several years experience working on pension and health care issues in the private sector, on Capitol Hill and with the Treasury Department.

Sweetnam said the overriding goal of the proposed Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs) and Employer Retirement Savings Accounts (ERSAs) was to simplify the number of savings options and the rules that govern them, and to increase the number of Americans who participate in a retirement plan.

Generally speaking the savings provisions would allow working people to set aside up to $7,500 a year in each of two new accounts, and as much as $12,000 in an employer plan meant to replace current retirement savings plans (double the amount for working couples). The plans carry extra advantages for wealthier Americans.

These accounts could be funded with after-tax dollars, but there would be no taxes on withdrawals. A lifetime of compounding could build accounts worth millions of dollars, and for the wealthy, if they never tap the accounts, the repeal of the estate tax means they would be allowed to pass these sums along to later generations that could withdraw them tax-free.

The Bush proposal would allow Americans who already have tax-preferred accounts to convert them this year into the new accounts. For some that would mean paying tax on the accumulated earnings in the account, increasing revenue for the federal government for the first few years.

Such conversions, along with the elimination of any tax deduction for traditional IRAs, would allow the savings accounts to be counted as actually raising $14.8 billion for the first five years of their existence. In an indication of their true long-term impact, however, they would begin costing revenue in 2008, and the amount climbs steadily through 2013, the end of the scoring period. From there on, they would lose more revenue as the accounts grow larger and are never subject to an income or estate tax.

According to some published reports the Section 529 savings plans would appear to offer a temporary way around the $7,500 annual limit. The moment the Lifetime accounts became effective, a family could open a 529 plan in their children's or grandchildren's names, fund it to the tune of $100,000 each without triggering the gift tax, and then immediately convert it to an LSA. Since the Section 529 account would have existed only briefly, there would be little in the way of earnings to pay tax on.

The Bush Administration proposes three new savings programs:

• LSAs could be used for any type of saving, including money that could be used for education, a new home, healthcare needs or a new business. The maximum annual contribution would be $7,500 (indexed for inflation). Their key feature is that contributions would not be tax deductible; earnings would accumulate tax-free, as would distributions.
• RSAs could be used only for retirement saving. The maximum annual contribution would be $7,500 (indexed for inflation). Their key feature is that contributions would not be tax deductible; earnings and distributions after age 58 (or upon death or disability) would be tax free.
• ERSAs would consolidate 401(k), 403(b) and governmental 457 plans, as well as SARSEPs and Simple IRAs into a single employer-based retirement savings account. ERSAs would follow rules similar to those for 401(k) plans, but with some changes to simplify the definition of compensation and the minimum coverage requirement.

Sweetnam is benefits tax counsel in the Office of the Benefits Tax Counsel at the US Department of the Treasury. His work involves all aspects of employee benefits taxation, including pensions, health care and executive compensation. He was the Treasury's primary contact with Congress with regard to the IRA and pension provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001.

Before joining the Treasury Department, Sweetnam was tax counsel on the majority staff of the US Senate Committee on Finance, under the chairmanship of Senator William V. Roth of Delaware.