NU Online News Service, Feb. 3, 4:55 p.m. — Washington

President Bush’s fiscal year 2004 budget could lead to the creation of new tax-favored retirement products that compete with life insurance and annuities.

In addition, the president is renewing his call for permanent repeal of the estate tax and for providing an above-the-line deduction for the purchase of long-term care insurance.

The president is also calling for repeal of Section 809 of the tax code, but he is silent about Section 815.

Looking first at the new tax-favored savings accounts, the president is proposing three new savings vehicles that would replace a whole range of existing accounts.

On personal savings, the president is proposing Lifetime Savings Accounts, or LSAs, and Retirement Savings Accounts, or RSAs, that would replace Individual Retirement Accounts.

LSAs would be available for any type of saving. All individuals, regardless of age or income, would be allowed to contribute up to $7,500 a year to their LSAs, and make withdrawals at any time for any purpose.

While contributions to LSAs would not be tax deductible, all earnings in LSAs would accumulate tax-free, and distributions would be tax-free as well.

RSAs, by contrast, are intended only for retirement savings. Individuals could contribute up to $7,500 to an RSA, with tax-free accumulation and tax-free distributions after age 58.

Any individual would be allowed to have both an LSA and an RSA at the same time.

As for employers, defined contribution plans such as 401(k)s and small business-oriented SIMPLE plans would be replaced by a new vehicle called an Employer Retirement Savings Account, or ERSA.

While these new accounts would generally follow the same rules as 401(k) plans, the rules would be simplified. For example, top-heavy rules would be eliminated and nondiscrimination requirements would be satisfied by either a single test or designing the plan according to a safe harbor.

Employers could contribute up to $12,000 annually to an ERSA, increasing to $15,000 in 2006.

At this writing industry groups were still studying the new savings proposals.

In addition to the new savings plan, the president’s budget calls for repeal of Section 809 of the tax code, but the plan is silent on Section 815.

Section 809 places an additional tax on mutual companies calculated by reference to the earnings of stock companies.

Section 815 involves taxation of certain policyholder surplus accounts held by stock companies.

The life insurance industry supports repeal of both Section 809 and 815, but repeal of the two sections has always been linked.

The call for permanent repeal of the estate tax was not a surprise. The president has advocated repeal since taking office.

On LTC insurance, the president has also long supported an above-the-line deduction. An above-the-line deduction means it is available to all taxpayers, whether or not they itemize.