Tax-Free Savings! Is That Good?

In addition, the new accounts would only help investors who have the $7,500 to $30,000 a year to invest. Because the proposal eliminates deductible IRAs, low-income taxpayers who need a tax break now to encourage savings (when the money is contributed, rather than withdrawn) actually will be worse off.

The second budget proposal would create Employer Retirement Savings Accounts (ERSAs, not to be confused with ERISA, the Employee Retirement Income Security Act). These accounts would consolidate 401(k), simple 401(k), 403(b) and 457 plans into a single type of plan. ERSAs would follow a simplified set of rules similar to those for 401(k) plans.

That simplifying, though, eliminates many of the rules that are in place to make 401(k) plans more fair to lower-income participants and prevent their use as tax shelters for top-level executives.

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