There's a number of tax-advantaged savings accounts for taxpayers â ranging from traditional and Roth IRAs to the new Achieving a Better Life Experience (ABLE) accounts to help disabled individuals. The problem is these accounts come with strings attached and aren't always available to the general public. Thus, many taxpayers who could benefit from tax-favored savings accounts either can't or don't use them.
One idea that is picking up steam on Capitol Hill is the universal savings account. On Nov. 20, Sen. Jeff Flake (R-AZ) formally introduced the concept behind this tax-saving device, which has been percolating for several years, in the Universal Savings Account Act. A companion bill was introduced in the House by Rep. Dave Brat (R-VA).
Under the legislation, a taxpayer age 18 or older could annually contribute up to $5,500 to the designated universal savings account. (The limit is the same as the current limit for IRA contributions.) The money would then be invested and could grow on a tax-free basis. When you take a distribution from the account, you wouldn't have to pay any tax regardless of how you use the money, just like a qualified distribution from a Roth IRA.
In a press release, Flake pointed out that this option eliminates certain restrictions typically associated with other tax-advantaged savings accounts. He added that the federal tax law provides incentives for certain savings, such as for retirement, education, and health reasons, while disincentivizing others. The Universal Savings Account Act would remove the tax bias and provide individuals with more freedom to utilize their savings by letting them decide when and how to spend their money, Flake said.
âCongress ought to be empowering individuals â not the federal government â to decide how to manage their savings, and it should start by establishing these tax-free universal savings accounts,â he said in a written statement.
In a post on his Facebook page, Brat wrote: âStatistics show 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. I have introduced a bill in the House to encourage more savings by Americans at all income levels. Universal savings accounts act like âsupercharged IRAs,' without the restrictions, confusion, and penalties associated with other savings accounts.â
The universal savings account seems to have a better chance of passage this go-round as it gains support from various quarters. Americans for Tax Reform (ATR), a conservative-leaning tax advocacy group, has jumped on board.
âNot only will this encourage households to save more of their hard-earned income, it will help curb the existing bias in the tax code toward double taxation of income. ATR supports this important, pro-taxpayer legislation and urges all senators to co-sponsor and support this bill,â the ATR wrote in a Nov. 23 blog.
We will keep a close watch on this legislation as it wends its way through Congress.