President Bush's sweeping proposals to expand tax-favored savings and retirement accounts may look quite different when Congress gets through with them - if they even survive - but some financial planners already are adjusting their strategies.
They're advising clients to remain flexible and not tie up dollars in long-term investments in case some version of the Bush plan passes and changes the way Americans save.
"It's not carved in stone at this point, but hearing about the proposal, it can't help but affect your thinking going forward," said Sue Stevens, director of financial planning for Morningstar Inc. and a financial planner in Deerfield, Ill.
The president proposes three new savings accounts.
The Lifetime Savings Account would allow an individual to salt away up to $7,500 a year. Cash would go into the account after taxes have been paid on it, but the money would grow tax-free and could be withdrawn free of tax at any time, for any purpose. Anyone could participate, regardless of age and income. Adults could fund accounts for children.
The Retirement Savings Account would be similar to a Roth IRA, which allows tax-free withdrawals, but without the income limitations.
Participants could make nondeductible contributions of up to $7,500 a year, provided the amount doesn't exceed wages. A worker, though, could make contributions for a nonworking spouse.
Tax-free and penalty-free withdrawals could be made after age 58. There would be no required distributions.
Under the Bush proposal, Roths would be renamed Retirement Savings Accounts. Traditional IRAs could be converted to Retirement Savings Accounts, but investors would have to pay any income taxes due on contributions or gains. IRAs that are not converted would not be allowed to accept new money.
With these two new accounts alone, a couple with two children would be able to shelter $45,000 a year from future income taxes.
Employer Retirement Savings Accounts would replace 401(k)s, nonprofits' 403(b)s, government 457 plans as well as some other retirement plans. Contribution limits would be the same as a 401(k) - $12,000 this year for workers under age 50.
Participants could make pre-tax contributions that would be taxed upon withdrawal or after-tax contributions that would be tax-free at distribution. Compliance and other rules would be greatly simplified, the Treasury Department said.
Tough sell ahead
If the president gets his way, the Lifetime Savings Accounts and Retirement Savings Accounts would be launched this year, while the employer accounts would begin taking contributions next year. But the proposal likely faces a tough sell, even in a Republican-controlled Congress, where some leaders have expressed skepticism.
The uncertainty is prompting some financial experts to adopt a wait-and-see approach.
"Our marketing people are very focused on this and trying to figure out what to do with it," said Christine Fahlund, senior financial planner for T. Rowe Price Associates in Baltimore. "It would have major ramifications for companies like ours. We would have to get all these accounts up and running and still maintain the old ones. Our recommendation to clients is to keep doing what you've always been doing."
But others are changing their advice, telling clients to keep their options open.
Some planners advise against buying annuities that carry hefty surrender charges for several years after their purchase. Surrender charges would make it expensive for investors to switch from a tax-deferred annuity to one of the tax-free accounts if they become available, said Mari Adam, a planner in Boca Raton, Fla.
Others are telling clients to postpone converting a traditional IRA to a Roth, which generally triggers a tax bill. That's because the president's plan, which encourages converting a traditional IRA to a Retirement Savings Account, would permit investors to spread the tax bill over four years, rather than pay it all at once.
Planners also are advising clients to delay making a $2,000 annual contribution to a Coverdell Education Savings Account, which permits tax-free withdrawals for kindergarten to college expenses.
"The Coverdells have restrictions of when they must be used. And the new savings account is wide open and gives investors a lot more choice," said Brian Orol, a financial planner in Madison, Wis.
Stevens said she recommends clients hold off investing in 529 college savings plans for now. These plans permit tax-free withdrawals if the money is used for college. Otherwise, the earnings are subject to income tax and a penalty.
A Lifetime Savings Account could be a good alternative to a 529 college savings plan because it offers more investment options and greater flexibility, Stevens said. "If a child doesn't go to college, you're not stuck with a 10 percent penalty," she said.
Still time for 529 plan
Investors will have time to fund a 529 plan later in the year if it appears Congress won't adopt Lifetime accounts, she added.