[T]he Bush team is eyeing another way to trim Americans’ tax bills: two tax-free savings accounts with fewer restrictions and much higher dollar limits than the current Individual Retirement Accounts (IRAs).
One plan, called a Lifetime Savings Account, would allow individuals to set aside up to $7,500 a year. The money could be withdrawn at any time, for any purpose, without penalty or tax.
The second, a Retirement Savings Account, would replace current IRAs and more than double the limit on contributions to $7,500. Money could not be withdrawn until retirement age.
It should be noted that this is an opening gambit in what is likely to be a long negotiation. As I noted , Bush has been as passionate about increasing government spending as he has about reducing taxes, and the resulting deficit pressure is starting to make it harder for him to push bold plans like this one through an increasingly skeptical Congress.
That said, a move like this one could be very helpful to non-taxpayers like myself, increasing the amount of our tax-free income, and keeping more of it liquid.
On the other hand, proposals like this one might be used as cover to eliminate or reduce other deductions and credits, so it’s hard to say how we’d fare until the proposal becomes law. The $7,500 “Lifetime Savings Account” that you can take money from penalty-free sounds especially suspicious — almost exactly the same amount as the personal & standard deductions combined. What do you bet the plan is to replace those deductions with this “Lifetime Savings Account” so that only if you establish the account and play by its rules do you get to take the deduction? Poor people who live paycheck to paycheck will be unable to make the required deposits, and the result will be to push more poor people onto the tax rolls than before. Sneaky pool, if my speculation is accurate.
Some conservatives are hoping that by making private savings accounts like these more attractive and easy-to-use, they’ll eventually be able to get more public support for reducing and eventually eliminating Social Security and Medicare. I’ve written about the payroll tax : how it’s not as easy to get out of as the income tax, and how the government uses this supposed “trust fund” to supplement the general fund. But getting rid of this tax is a long-term goal of conservatives and it’s a long shot that much will change in the short term.