When President Bush revealed his latest budget in early February, he included in it a pet proposal for several new tax-advantaged savings accounts. Many financial services analysts doubt the plan will be approved, at least in its current form. But, if it were to get a Congressional nod, the proposal would not only have significant implications for both college and retirement planning, but it could mean a big boost for advisory business, too.
For now, the proposal is for two new savings vehicles for consumers. The Retirement Savings Accounts (RSA) would have a $5,000 contribution limit per individual, a decrease from the $7,500 in the original proposal of a year ago. Investors wouldn't be able to deduct what they put in, but earnings would grow tax-free. There would be no income limitations, although contributions couldn't exceed the investor's compensation. Distributions, which would also be untaxed, could be taken after age 58, or in cases of death or disability; earlier withdrawal would trigger an unspecified penalty.
Similarly, the Lifetime Savings Accounts (LSA) would have the same annual contribution limit and tax treatment as the RSA. But, there would be no age or income limits for contributions or distributions. Plus, you could use the money for anything you wanted and withdraw any amount at any time, without incurring a penalty. In addition, another proposal called for a third vehicle, Employee Retirement Savings Accounts (ERSA), which would simplify 401(k) and other employer-sponsored plans into one type of account.
What does it all mean for reps? “Any time there's a new product, it's a huge opportunity,” says Francis Becker, who runs Becker & Associates in Lynbrook, N.Y. “I think it's going to be terrific for reps.” For one thing, there's a four-year period during which investors can convert their Roth IRA money over to the RSA — and reps can step in to help that process along.
More important, however, while the new accounts are meant to simplify the complicated array of investment choices, in the short term, they are likely to make matters more confusing. And that spells a major chance for reps to step in, help clients make sense of it all and determine the best course of action, in much the same way that reps have used their ability to decipher the increasingly convoluted landscape of 529 plans.
“This will add one more layer of confusion,” says Doug Charney, senior vice president of investments at Wachovia Securities in Harrisburg, Pa. “And someone's going to have to educate the public about it.”
And there's another wrinkle: The new proposal allows states to open up their own LSAs, potentially adding another level of confusion to the arena — and another reason for clients to use the services of their rep. Then, again, there's the ERSA, which would morph employer 401(k) and similar plans into one type of vehicle. For reps handling company 401(k) business, “it could have a big impact on advisors in that area,” says John Neresian, managing director of Nuveen Investments in Chicago.
This is a good thing, too, because the accounts have some potential pitfalls. People can withdraw money from the LSA without adverse tax consequences. Some think that investors might be more willing to contribute this way, but that, of course, has a substantial downside, especially for consumers using the account as a college or retirement-savings vehicle. Some observers conjecture that, for most investors, the temptation to use the money for short-term purposes would be too hard to resist.
“It wouldn't be good for people likely to make withdrawals for relatively frivolous expenses,” says Gail Buckner, senior vice president of Boston-based Putnam Investments. The result could be, in effect, the creation of nothing more than a tax-advantaged checking account.
At the same time, the LSA would probably affect existing college-savings plans, like the state-sponsored 529. In these plans, consumers can contribute whatever they want, as long as accounts don't exceed about $250,000 in total, depending on the state; money builds up without being taxed and withdrawals are also tax- free — money must be used for tuition and education expenses, however.
Unlike 529 plans, under the LSA, children can get access to money in accounts in their name when they reach the age of majority, usually age 21. However, 529s have significant estate-planning benefits that LSA's lack. Investors can contribute $55,000 singly or $110,000 for a couple at one fell swoop for a five-year exclusion.
The LSA's easy withdrawal policies could mean an added caretaking responsibility for reps, who may face the task of reining in their less-disciplined clients — or, potentially, discouraging them from even opening one. “You have to know your clients,” says Buckner of Putnam Investments.