“Don’t bother saving unless you save for retirement.”
That’s the wrongheaded message our tax code sends to young and low-income Americans. Retirement savings accounts protect savings from being taxed twice, but the accounts are complicated and carry steep penalties for not following the rules. Americans need a way to save for things other than retirement.
Universal Savings Accounts (USAs) do just that. They reduce taxes on savings and help families build financial security through a single, simple and flexible savings account.
USAs are like turbocharged retirement savings accounts — without all the complicated, Washington-imposed rules. Every American could deposit after-tax income into a USA, and all subsequent earnings from the account would be tax-free.
Essentially, USAs would work just like 401(k) retirement accounts, but with one huge difference. USA savers could withdraw their money whenever they want and spend it on whatever they want.
Without special savings accounts, the U.S. tax code discourages personal saving by taxing it twice. Income taxes take the first bite, extracting money from your earnings — money that’s usually withheld even before you get your paycheck. Then, if you save a bit from your take-home pay, Washington taxes you again, taking a cut of whatever those savings have earned.
What this means is savers are taxed more than people who spend all their money when they get paid. That’s not fair.
USAs would help lower-income and younger Americans the most.
For young savers, locking up their money in a retirement account for the next 40 years is a frightening proposal — partly because many view saving for retirement as a luxury they can’t afford and partly because the complexity and fees of retirement accounts, while only small hurdles for the affluent, discourage many low-income and middle-income Americans. If they save and invest for their future outside a retirement account, the government whacks them back down with a second level of taxes.
But saving shouldn’t be just for retirement or just for rich people. USAs would help Americans save for their first car, a needed home repair, or that next emergency, whatever it might be. A USA would allow young people to start saving without the complex rules and penalties that currently scare them away.
USAs have proved successful at promoting saving around the world. Britain and Canada have pioneered the model of simple, flexible savings accounts to help people save for their own priorities. In both countries, the accounts are popular and widely used. In Canada, 40 percent of households save money in such accounts, and low-income savers hold more than half of those accounts.
Creating a culture of saving and investing for the future could help support retirement savings too. Getting in the habit of putting a few dollars away each paycheck is one of the biggest hurdles to saving. Encouraging the habit would set up more Americans for independence in retirement.
USAs give people an inducement, and the flexibility needed, to save for something other than retirement. This is particularly important for those who may be reluctant to put their money away for several decades.
Congress proposed a limited USA “tax reform 2.0” earlier this year. The proposal should be expanded by raising the contribution limit and allowing savers to roll over any unused contribution capacity from year to year.
USAs would allow Americans at all income levels to save more of their own income with fewer Washington-imposed restrictions on where and when they can spend their own money. They’re an excellent idea whose time has come.
This piece originally appeared in The Washington Times