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Bush seeks to boost to tax-sheltered retirement plans
WASHINGTON (CNN) -- Hoping to stave off criticism that his dividend tax plan would discourage retirement savings, President Bush will propose a series of changes to make IRAs and other tax-sheltered savings far more attractive and accessible to American workers, a senior administration source told CNNfn. The Bush administration is expected to announce the changes Monday as part of the new budget roll-out, the source said. The plan would simplify and consolidate federal retirement plans by phasing out traditional tax-deductible IRAs in favor of Roth-like retirement plans with larger limits on contributions. The proposal would also include a second type of plan that would allow taxpayers to save for large purchases -- "anything from a car to a house," the official said, without providing any other details. IRAs are individual retirement accounts. The proposed changes were not revealed during Bush's State of the Union address Tuesday evening, nor were they shared with interest groups representing retirement and savings groups. "I think it took everyone by surprise," said James Klein, president of the American Benefits Council. Among the changes the administration seeks is a move to further increase savings limits on IRA and Roth IRAs to $7,500. This year, the savings cap is $3,000 (or $3,500 for those over 50) and, under the current tax law, won't reach a maximum of $5,000 (or $6,000 for those over 50) until 2008. Contributions to traditional IRAs are tax-deductible, and earnings are taxed upon withdrawal. Roth IRA contributions are made on an after-tax basis and earnings grow tax-free. The tax advantages of IRAs provide an incentive for individuals to save for their own retirement. Some fear that Bush's move to eliminate individual taxes on corporate dividends would make various retirement plans less attractive. The new retirement plan proposal, however, could "readjust the retirement plans so they could keep their same degree of advantage" as before the dividend plan was revealed, said Nicholas Kaster, senior pension and IRA analyst at tax law publisher CCH. In addition to boosting the IRA savings limits, the administration would make it possible for more individuals to participate in the plans. Specifically, it would eliminate income limits that currently prohibit upper-income wage earners from contributing to them, according to the Wall Street Journal, Currently, single individuals with an adjusted gross income over $110,000 and married couples whose gross income tops $160,000 are barred from establishing a Roth IRA. The income limits to open a traditional IRA, where contributions are tax deductible, are even lower -- $50,000 for single filers and $70,000 for married couples filing a joint return. Finally, the administration is seeking to start a new "lifetime savings account" with annual contribution limits as high as $7,500. These plans would have the same tax-saving features as a traditional IRA, where earnings would grow tax-deferred. But they also would give individuals greater access to their money, said Klein. That's because withdrawals from an IRA are subject to a 10 percent penalty if taken out before age 59½. The new lifetime accounts would have no such restrictions on withdrawals, Klein added. But it is unclear whether the lifetime accounts would discourage individuals from putting their earnings in retirement plans in favor of the new savings accounts. "From our perspective, all savings is good, and I'm loath to criticize it until we see detailed plans," said Klein. "But the main question it raises is to what extent does this encourage or discourage long-term savings? From the short details we've seen, it doesn't appear that the lifetime savings accounts would have the same restrictions." -- CNN/Money's Leslie Haggin Geary contributed to this report.
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