Bush Plan Even Has Something for the (Rich) Kids

For wealthy Americans, President Bush's plan for a new kind of savings account has something for everyone -- even for the kids.

So how much money do you save every year? The larger the amount, the more President Bush's plan for a new kind of savings account will help you. The flip side, of course, is that the new plan provides no help to individuals who aren't able to save, and won't likely increase the nation's savings rate. It would, as I'll explain in a moment, give wealthy individuals the opportunity to effectively avert the kiddie tax and sock away up to $15,000 a year for every child -- with zero tax consequence.

First, let's revisit the basics of the proposal. It creates two new consolidated savings accounts: Lifetime Savings Accounts, or LSAs, and Retirement Savings Accounts, or RSAs. Not only can individuals contribute up to $7,500 a year to these accounts regardless of their income or age, but the proposal also includes a provision that will allow existing accounts to be converted into these new accounts.

Both LSAs and RSAs allow individuals to contribute up to that amount each year, but there are no restrictions on withdrawing. Like Roth IRAs, contributions will be after-tax (in other words, contributions are not deductible), but all withdrawals will be tax-free -- including earnings on your contributions. Unlike Roth IRAs, there are virtually no holding periods, age requirements or restrictions on what the money is withdrawn for.

Money in LSAs can be used for anything. RSAs are specifically for retirement, and withdrawals of earnings are tax-free only after age 58. The proposal allows individuals to contribute the maximum amount to each account every year --¿ so each investor can contribute up to $15,000 ($30,000 for married couples) a year to these new accounts.

But wait -- there's more!

Unlike the Roth IRAs, which these accounts are modeled on, individuals can contribute the maximum regardless of how much income they have. While the emphasis has been on the removal of income limits on the upper end, it also means another significant benefit -- investors can open accounts for their children, too.