I have proposed that America adopt a Canadian-British innovation to encourage greater household savings. Canada’s Tax Free Savings Accounts (TFSAs) and Britain’s Individual Savings Accounts (ISAs) are revolutionizing savings for moderate- and middle-income families in those countries.
Now Americans may get a chance to save in a similar tax-friendly vehicle. Senator Jeff Flake (R‑AZ) and Representative David Brat (R‑VA) are introducing companion Senate-House bills (S. 2320 and H.R. 4094) to create Universal Savings Accounts (USAs). The accounts are like supercharged Roth IRAs.
Here are some of the features of the Flake-Brat USAs:
- Americans could save without the restrictions, confusion, and penalties associated with other savings accounts.
- Anyone 18 years of age or older could open a USA, contribute up to $5,500 after-tax a year, and use the tax-free withdrawals for any purpose at any time.
- Funds would be invested in bonds and equities, and grow tax-free.
- USA accounts would allow individuals to decide what to use their savings for and when, without Congress micromanaging their choices, as they do with other accounts.
Flake and Brat cite data showing that only 53 percent of adults could currently cover an emergency expense of $400 without selling an asset or borrowing, and most Americans do not have the recommended three to six months of income in their current savings accounts.
As Ernest Christian and I have noted, USAs would help solve these sorts of problems for many Americans by giving them a savings account that maximized liquidity and flexibility, while zeroing out taxes that eat away at returns. Flake and Brat are right that their USA accounts would encourage more savings by Americans at all income levels.
House Speaker Paul Ryan is known to admire these sorts of accounts, and numerous Republican presidential candidates have pro-savings features in their tax plans. So if the next president is a Republican, we should have a good chance at making these pro-family, pro-growth savings accounts a reality.
