Bush to propose tax-free retirement account

Critics say Roth-like plan to mostly benefit affluent

January 31, 2003|By NEW YORK TIMES NEWS SERVICE

The Bush administration is working on a major shift in retirement savings plans that would allow most Americans to greatly increase the amount of money they could put away in tax-free accounts for retirement and other purposes, administration officials and congressional staff members said yesterday.

The change, which would primarily benefit the affluent who can afford to save more of their incomes, is aimed at encouraging an increase in the lagging personal savings rate and at simplifying the maze of retirement savings choices and other tax-deferred accounts for things such as college education and medical expenses.

It also appears intended to respond to the administrators of mutual funds and pensions who complained that President Bush's proposal to eliminate personal taxes on dividends would undercut tax-deferred plans, which require recipients to pay income tax upon withdrawal.

The move could increase tax revenues in the short term, helping the White House hold down the budget deficit over the next few years, but it would cause a substantial drain on tax revenues after 10 years or so, economists said.

"This looks like a mechanism to allow people with lots of wealth to move large amounts of money into tax-sheltered vehicles," said Robert Greenstein, the executive director of the Center on Budget and Policy Priorities, a liberal research group. "As a result, the budget deficits get worse and worse."

The proposal, expected to be included in the new budget that Bush is to unveil Monday, would allow people to keep existing individual retirement accounts. But it calls for phasing out future contributions of up to $3,000 a year to traditional IRAs, which allow many middle-income people not covered by a formal pension plan to avoid paying tax on retirement savings until the money is withdrawn from the accounts.

At the same time, the proposal would allow anyone - regardless of income - to contribute up to $7,500 a year to a new retirement savings account similar to the Roth IRA. It would not offer an initial tax deduction but would allow all the money that accumulated in the account to be withdrawn tax free.

The plan is expected to eliminate the extra penalties for withdrawing money prematurely from existing IRAs, encouraging individuals to convert the proceeds to tax-free accounts. Gains in the existing IRA would be taxed, generating a windfall for the government.

Currently, participation in tax-free Roth retirement accounts is limited to individuals with incomes of less than $90,000 and couples with incomes below $150,000.

The proposed changes fit into a broader political goal of the Bush administration, analysts said. The administration's hope is to cultivate support in what they believe is a huge "investor class," middle- and upper-income people who invest in the markets and make heavy use of tax-advantaged individual retirement plans.

The administration plan also fits into its larger goal of eventually overhauling the tax system. Implicit in many of the plans is the idea that investment income should not be taxed at all. The new plan, also aimed at simplifying many rules governing pension accounts, would be a big step in that direction, vastly expanding the amount of investment income that is permanently shielded from taxation.

But while the proposal would mean greater savings opportunities for nearly everyone, critics said it would not substantially help the bulk of Americans who earn less than $100,000 a year because they generally do not bump up against the current limits on contributions to tax-deferred and tax-free accounts.

"This seems entirely oriented to the very richest end of society and extending them yet another break," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington.

The plan, which was disclosed in part on Wednesday in USA Today and The Wall Street Journal, is likely to run into strong opposition from Democrats in Congress.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.