Lifetime Savings Accounts

I stumbled upon something interesting on the web the other day, the Lifetime Savings Account.

The LSA is a Bush administration proposal for a new kind of retirement account that might best be described as a Roth IRA on steroids. The discovery of the LSA proposal was exciting to me, because as a sole-proprietor with “variable” income, my only regular avenue for tax-advantaged retirement saving has been the Roth IRA. The problem with Roths is that the contribution limits are extremely low, maxing out at $3,000 per year. Obviously, unlike the 401k, there is no employer matching my contributions, not to mention no discounted stock purchasing, no options, no perks of any kind to sweeten the pot.

I established a Roth IRA because it has one big advantage over other retirement accounts. Your Roth IRA contributions are made “after tax”, so they don’t give you any tax break today like you’d get with a traditional IRA or 401k. But when you retire in 40 years or so, the money can be withdrawn from a Roth IRA tax-free.

At least, that’s the way it stands today. One never knows when a future cash-strapped Congress will turn on those of us who have built our retirements around the tax-free withdrawals promised by that very same body and start taxing the withdrawals.

I also like the Roth IRA because the long term trend over the past century has been toward higher taxes, larger government, and wider deficits. This suggests that taxes in the future will be higher than they are today, and any strategy that minimizes them at that point will be well worth the minor pain one endures today by losing the tax break on retirement account contributions.

The Lifetime Savings Account is an improvement on the Roth IRA because it increases the annual contribution limit to $5,000 while still allowing contributions to an expanded Roth IRA at $5,000 per year. That allows up to $10,000 of after-tax income to be placed in a future tax-advantaged retirement account. LSAs — as proposed, at least — would also remove many of the restrictions on withdrawals and contributions. This translates into greater freedom for Americans to use their own money as they choose. Freedom is a good thing.

LSAs were proposed by the Bush administration in January, 2003 and reached Congress in 2004 (S2263 in the Senate and HR4078 in the House). Both bills were referred to their respective finance committees where, as far as I can tell, they simply sat on the desk for the remainder of the 108th Congress.

With Keogh, 401k, SEP-IRA, and other retirement accounts typically having far higher contribution limits, I applaud the Bush administration for filling this hole and expanding the options for self-employed Americans. Now all the Congress needs to do is pass the legislation. It’s a shame the bills were stuck in a drawer this year. Hopefully the 109th Congress will display a little more moxie.

A decent rebuttal to some common arguements against LSAs can be found here.

I’ve already sent in my absentee ballot, but if I hadn’t, this is the kind of thing that would tilt the table in favor of the President.


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