Universal Savings Accounts Introduced in Congress

November 24, 2015

Last week, S.2320, a bill that would create Universal Savings Accounts in the federal tax code, was referred to the Senate Finance Committee. The bill, sponsored by Senator Jeff Flake and Representative Dave Brat, would allow Americans age 18 or older to open an account to which they could contribute $5,500 of after-tax money. The money could be invested in bonds and equities, and grow tax free.

In many respects, these would resemble Roth IRAs in structure, but there would be one key difference: withdrawals from these accounts could be made at any time, not just after retirement age. This flexible role would allow people to withdraw cash for things like emergencies, mortgage down payments, or any of the other large one-time expenses for which they might need to save.

These accounts are properly constructed according to the principle that tax burdens should be neutral over types of economic activity. Under this system, regardless of whether you spend your money now or later, your total spending power is reduced by the same percentage. (Or, alternatively, you could look at it this way: the structure of these accounts ensures that the rate of return on saving isn’t reduced artificially through taxes.)

This is a step in the right direction; the proposal could be improved, though, with a higher contribution limit. Additionally, lawmakers may want to consider the traditional IRA structure, which gives a tax deduction up front, and then taxes withdrawals at ordinary rates.


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