I like the ideas offered here by Cato’s Chris Edwards and Ryan Bourne. They discuss ways to simplify retirement savings accounts, and reforms that have been made to the similar systems in Britain and Canada. Then they explain the benefits of Universal Savings Accounts, a reform to the saving system being offered by Congressman Dave Brat and Sen. Jeff Flake.
Canadian- and British-style savings accounts may be coming to America. Sen. Jeff Flake (R-AZ) and Rep. Dave Brat (R-VA) have introduced companion bills — S. 323 and H.R. 937 — to create Universal Savings Accounts (USAs).22
Under the legislation, anyone 18 years of age or older could open a USA and contribute up to $5,500 in cash per year after-tax. Account holders could make withdrawals tax- and penalty-free at any time for any reason.
USA funds would be invested in bonds or equities, and would grow tax-free. USAs would allow individuals to decide what to use their savings for and when, without Congress micromanaging their choices, as it does with current tax-preferred savings accounts.
The Flake-Brat legislation proposes USAs as an additional vehicle alongside existing saving plans. However, a goal of current Republican tax reform efforts is simplification. As such, policymakers should consider replacing a number of savings vehicles with large USAs. We suggest creating USAs with an annual contribution limit of $10,000 or more, combined with the elimination of traditional IRAs, Roth IRAs, and Coverdell Education Savings Accounts (ESAs).23
Traditional IRAs generally allow a tax deduction for contributions and then taxation of withdrawals in retirement.24 The bulk of assets in traditional IRAs come from rollovers, mainly from 401(k)s.25 Roth IRAs allow for after-tax contributions and tax-free withdrawals during retirement. The combined annual contribution limit for IRAs is $5,500.26 ESAs have an annual contribution limit of $2,000 per child, tax treatment similar to Roth IRAs, and complex rules on withdrawals. All three types of accounts have income limits, penalties for nonqualified withdrawals, and myriad other rules.27
For savers, USAs are superior to these accounts because they are simpler and more flexible. USAs could be used for retirement, education, or saving for any other purpose.
Read more here.
Rep Brat Encouraging Savings through his Universal Savings Account Act
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