As Americans anxiously look over their tax bills and contemplate their financial futures, they’re increasingly turning to tax-free retirement accounts to offer a respite from Uncle Sam. Even though accounts such as Roth Individual Retirement Accounts (IRAs) and Roth 401(k)s offer tax-free growth, Americans are more and more confused and intimidated by the labyrinth of different investment plans and the withdrawal restrictions and contribution minimums that come with them.
A new vehicle for investments proposed by the Trump administration, Universal Savings Accounts (USAs), could be a fresh opportunity for Americans to save tax-free and serve as a simple, user-friendly investment account. These accounts would allow workers a respite from the taxman and the flexibility of withdrawing their hard-earned dollars (potentially tax-free) whenever they need to. USAs can make Tax Day just a little better for the millions of Americans agonizing over the IRS and tax planning.
Millions of Americans filing their taxes ahead of the April 15 IRS deadline are doing well for themselves – so well, in fact, that they’re finding themselves in higher tax brackets. In 2019, median wages for American workers rose 3.7% as workers have more job opportunities than ever before. The bottom quarter of wage earners has especially benefitted from the resurgent economy, with 4.7% wage growth in 2019. But for all of this extra take-home pay, a worrying percentage of Americans are still opting to spend rather than save and invest their hard-earned dollars. About one-fifth of U.S. workers are spending all of their disposable income, a figure little changed from the Great Recession more than 10 years ago. One key reason is that investment accounts such as IRAs are simply too confusing and complex to many Americans.
A 2017 survey by insurer TIAA-CREF asked participants why they don’t have an IRA and more than a quarter of respondents professed that they simply did not know enough about these tax-advantaged accounts. Further, nearly a fifth of respondents said that IRAs were simply too complicated. It’s hard to blame them, considering “required minimum distribution” rules, deduction limits based on incomes, and intimidating tax penalties for unqualified withdrawals. Some wealthier taxpayers will shell out the money required for a personal accountant who can navigate through these complex rules, but many Americans simply cannot afford an accountant. On top of this tedium, many Americans anticipate having significant expenses in the here-and-now and aren’t exactly eager to sock their money away for 50 years.
Fortunately, the Trump administration is considering making the investment process considerably easier by proposing the creation of USAs. Americans would contribute to these plans with after-tax income, but Uncle Sam would get only one bite of the apple. Money could grow in investment accounts for years, with cash outs available whenever individuals or families need them penalty free. Gains wouldn’t be subject to capital gains taxation, which takes a 15% chunk out of investment income for middle-class Americans. This would be an unqualified boon to millions of working Americans hamstrung by current, confusing investment plans.
It would also be a new source of liquidity for thousands of American businesses that have seen unparalleled expansion over the past few years. Financial experts are already worried that the current economic boom may be undercut by drying liquidity, as an increasing number of companies vie for a limited supply of investment dollars. According to Bank of America Merrill Lynch equity and quant strategist Savita Subramanian, “Over the past year we’ve seen liquidity risks bubbling up. When the wall of worry turns to panic selling, we worry about an unlikely area of liquidity risk: the S&P 500.”
By spurring more Americans to invest, USAs can provide the resources to keep the U.S. economy booming and benefiting all workers. Tax season needn’t be a time of cautious complication of complicated financial instruments. The Trump administration can, and should, work with Congress to deliver a simple, low-cost investment plan for stressed, over-taxed Americans. USAs can drive a better, more prosperous USA.
Marchand is director of policy for the Taxpayers Protection Alliance.
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