Analyzing the Bush savings proposals.

• Author: Schnepper, Jeff A.
• Position: Economic Observer

PRES. BUSH wants to change how you save and invest. On Jan. 31, he unveiled a sweeping reconstruction of savings options and recast your investment opportunities. Let's look at what's been proposed and what it means to you if these new tax-advantaged plans are passed into law.

Lifetime Savings Accounts (LSAs). If you have money to save, this is where you want to start! There are no age requirements and no income limitations. You can even invest in an LSA if you don't have any income. You can contribute $7,500 per year ($15,000 if you are married) plus another $7,500 for each of your children or other family members. You can even contribute for a really good friend, or for your favorite economics columnist.

You get no deduction for the contribution, but you can make withdrawals at any time without any tax or penalty. You could use these dollars for anything you want--including your offspring's education, a new home, health care, or to start a business. Or, you could blow the money on a trip to Las Vegas. You don't even have to document where the dollars went. Forget about worrying about "qualified expenses."

There is no minimum holding period, and all earnings and distributions are tax-free. Forget the hassle factor. The combination of universal eligibility and unrestricted tax-free withdrawals greatly simplifies the entire process. You can access the money at any time and receive tax-free earnings from your first dollar of savings. Why would you invest your first dollars anywhere else?

This is better than municipal bonds or Section 529 Qualified State Tuition Accounts. Moreover, prior to Jan. 1, 2004, you can convert any balances in an Archer Medical Savings Account or Qualified State Tuition Plans to an LSA.

Do you want to beat the $7,500 per person limit? A married couple can put as much as $110,000 into a Section 529 Qualified State Tuition Account without any tax consequences. Convert before 2004 and you win.

Remember, this is just a proposal, but there's no reason why I can't set up a Section 529 Qualified State Tuition Account for myself as well. With one for me, one for my wife, and one each for my three kids, that's as much as $550,000 invested tax-free. I wish I had the money!

The wealthy will love this. Any tax-free income saves them big bucks in their higher brackets. However, it also is an enormous boon for even lower-bracketed individuals. It means that their investments would no longer be taxed. That increases the net rate of...