So what is this Canadian savings account? The nearest U.S. equivalent would be Roth Individual Retirement Accounts. With a Roth, workers pay taxes on earnings before they put their cash into the account. The money then grows tax-protected, and people pay no tax when they withdraw it.
However, Roth accounts have numerous restrictions. You can’t open a Roth easily if your earnings are above certain limits: $191,000, for example, for a married couple filing jointly. You can’t withdraw cash whenever you feel like it, at least not without daunting penalties. So even when Americans have money to save, they often hesitate to stash it in a Roth.
Canada’s TFSAs are like Roth IRAs—but supercharged. Citizens may deposit up to $5,500 after-tax each year, and all account earnings and withdrawals are tax-free. However, unlike Roth IRAs, funds can be withdrawn at any time for any reason with no penalties or taxes. Another feature: The annual limit on a contribution carries over from year to year if a citizen doesn’t reach it. So if a Canadian contributes $2,000 this year, he can put away up to $9,000 next year ($3,500 plus $5,500).
There are other attractive features: Unlike in a Roth, there are no income limits for individuals contributing to a TFSA, and there are no withdrawal requirements at retirement. The accounts can be opened easily at any bank branch or online. They can hold bank deposits, stocks, bonds, mutual funds and other types of assets.
There are several reasons the U.S. is primed for its own TFSA. The first is legislative: Creating such an account would not be difficult for lawmakers, certainly not compared with revamping the whole tax system. Congress can simply expand eligibility and lift limits on the Roth IRA format.
We believe this new tax vehicle—call it the Universal Savings Account—would be so attractive that Americans would select it over education savings accounts or traditional programs, especially if its annual contribution limit is $7,000 or $8,000, which is higher than the current $5,500 for Roth IRAs. There would be no need to cut off access to or abolish the Roth IRA or other programs. Merely let citizens choose a new one.
Another virtue of a Universal Savings Account is simplicity. Savers would spend more time evaluating investments and less time mastering the twists and turns of tax law.
A Universal Savings Account would also give citizens the incentive to save. Without withdrawal penalties hanging over them, people would be less likely to hesitate before putting money into these accounts. Some people might use their accounts to fund an expensive vacation. But it’s much more likely they would use the money for serious projects, to build up a retirement fund, or even to invest in a new enterprise.
Some critics might charge that a Universal Savings Account can’t be “pro-family” if it also benefits unmarried millionaires. We disagree. Tax policy is not a tug of war between families and singles: All can win. The autonomy these accounts offer to everyone will make families become—and think like—millionaires.
Other critics will warn about revenues lost decades hence when Americans withdraw tax-free. But shortfalls in the future may well be made up by the growth that would ultimately flow into federal coffers. The growth that comes from more savings and investment will raise living standards. And Americans, single or in families, middle class, lower-income or affluent, would become more self-sufficient.
Let’s follow the good example of our Canadian neighbors. And let’s judge the presidential candidates by how seriously they take true savings projects such as this one.