Ask the Expert: What's the Outlook for Tax-Free Savings Plans?

Editor's note: Got a question you'd like to ask about sectors, companies or issues affecting the markets? Email us at [e-mail], and one of our reporters will track down an expert. In today's "Ask the Expert," personal-finance writer Beverly Goodman explains how proposed tax-free savings plans would work.

With a surprisingly good economic quarter in its pocket, the White House is resurrecting a piece of its fiscal initiative for President Bush's re-election campaign: tax-free savings.

First touted back in January as part of President Bush's proposed budget, these tax-free savings accounts would include virtually no restrictions -- no income caps and minimal age requirements.

The plan rests on the premise that investment income should not be taxed. And while the administration is promoting it as a way to help all Americans save, it not surprisingly benefits the wealthy more than lower-income individuals.

The initial budget proposal would have created two new consolidated savings accounts: Lifetime Savings Accounts (LSAs) and Retirement Savings Accounts (RSAs). Not only would individuals be able to contribute up to $7,500 a year to these accounts regardless of their income or age, but the proposal also includes a provision that would allow individuals to transfer existing accounts into these new accounts. There would be no restrictions on the money's withdrawal.

As with Roth IRAs, contributions would be after tax (in other words, contributions are not deductible), but all withdrawals would be tax-free -- including earnings on your contributions. Unlike Roth IRAs, there would be no holding periods, age requirements or restrictions on what the money is withdrawn for.

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