What Would Bush's Investment Plan Mean to You?

In their proposed form, President Bush's new savings plans would dramatically alter the financial planning landscape. It's too early to predict the ultimate fate of these proposals; many pundits doubt that the plans will get passed in anything close to their current form. But there are a number of strategies you can employ to be ready for whatever comes.

First, let's briefly review the accounts themselves. As you know, we're currently saddled with a wide range of savings plans and accounts, each with unique regulations. The introduction of the Lifetime Savings Account (LSA), Retirement Savings Account (RSA), and Employer Savings Account (ESA) could greatly simplify saving and investing.

While Congress debates the proposed plans and their merits, there are several ways you can add value for your clients. First, educate them about the new accounts and be prepared to discuss how they could affect their overall financial plan. Second, given the enormous implications of these accounts for your clients' portfolios, make plans now to prepare for their potential approval.

As the table on the following page shows, many types of existing accounts can be converted to an LSA, an RSA or an ERSA. Generally speaking, the decision will come down to the client's age, his objectives, his tax liability and his current and projected tax bracket. For younger clients with smaller balances in their existing savings accounts, a conversion might make sense. For older clients with large account balances, it may not be worthwhile to convert assets to the new accounts.

Under the current proposal, a person can convert Coverdell Education Savings Account, Qualified State Tuition Plan, or Archer Medical Savings Account to an LSA any time before Jan. 1, 2004. IRA owners can convert accounts at any time, but if they do so before January 1, 2004, they can spread the tax on the conversion over a four-year period. For conversions on or after Jan. 1, 2004, the total taxable amount is included in their gross income for the year of the conversion.

Now let's take a closer look at LSAs and RSAs and review some other factors regarding conversions.

LSA conversions: Some financial advisors have expressed concerns about the ease with which investors can withdraw money from an LSA. With no restrictions, an undisciplined client may “raid” his account to receive immediate gratification, without regard to their longer-term goals. Another issue is how to manage an LSA given competing financial goals and timeframes. You may find it more advantageous to keep some existing accounts that are earmarked for a particular goal, such as a 529 plan, for example.

RSA conversions: This will likely be the most frequent conversion you will encounter. While contributions to traditional IRAs will be phased out in 2004, you have the option of keeping these existing accounts open. The largest factor will be a client's tax liability — not unlike the decision-making process you faced when Roth IRAs were introduced. With regard to Roth IRAs, they would remain largely unaffected, since they would simply be renamed RSAs. Therefore, if a client was planning to contribute to their Roth IRA in 2003 there are not any conversion issues to deal with.

Meanwhile, contributions to deductible IRAs will still be allowed in 2003 and the power of tax-deferred compounding still makes sense — especially if the client expects to be in a lower tax bracket when they retire. The same contribution rules apply to non-deductible IRAs. However, since the client won't be receiving an immediate tax deduction it might make more sense to wait to see if the RSA gets enacted so you do not have to deal with the rules of non-deductible IRAs.

One outgrowth of the prolonged bear market — investor stockpiling of cash — would present numerous opportunities should the proposals pass. The cash positions could be redeployed into LSA and RSA accounts with the added benefit of tax-free growth potential. To state it simply: Cash could become king in 2003, as clients with large sums will be better equipped to maximize the $7,500 (per person) that can be invested in both an LSA and an RSA.

Those of you with small business clients might find that the simplification of employer-sponsored retirement plans makes them more attractive to your customers. Though the contribution limits will be the same as they were with 401(k)s, greater amounts can be contributed than the current SIMPLE 401(k) and SIMPLE IRA plans used by many small businesses.

To be sure, much uncertainty surrounds the proposed savings accounts. But even in their proposed forms, they represent a tremendous opportunity for your clients and for your business. By preparing now for the potential of these accounts “going live” in 2003, you will position yourself to serve a myriad of client goals in the future, including college, retirement and estate planning.

Writer's BIO:
Susan L. Hirshman is vice president at JPMorgan Fleming Asset Management. jpmorganfleming.com

Bush's Fiscal Plans

A summary of the proposed savings plans and their tax implications. Remember, the proposals have a long way to go before becoming law.