What’s all the Buzz About Tax-free Universal Savings Accounts?

There has been talk since 2002 of creating Universal Savings Accounts, or USAs, as they’re called. What do you need to know about them?

Currently, Roth IRAs are the most popular tax-free savings account, but they have limitations that can be addressed with a USA. You can only contribute to a Roth IRA if you’re making less than $160,000 as a married couple or $110,000 if you’re single. Your annual contributions are limited to $5,000 if you’re under age 50. If you take distributions before your Roth IRA is five years old or before you turn 59½, you’ll pay a 10% tax penalty (with some exceptions).

A USA works differently. First, unlike a Roth IRA, this type of account isn’t limited just to retirement savings. Rather, its purpose is to promote any kind of savings. Next, all American citizens can participate and contribute the greater of $10,000 or 50% of their taxable income. And, just as importantly, any distributions that occur three years after the creation of the account are tax-free and carry no penalties.
Compared to other IRAs and 401(k) plans, the USA offers greater benefits and ease of use.

Every now and again, a great idea comes along and trumps an existing one. This is certainly the case here. The incentive to save is built into the program and offers great benefits for participants. The only thing to watch out for is opportunistic politicians and lawmakers who might tinker with the benefits of these accounts, making them less attractive.

Do IRAs and 401(k)s meet your investing needs, or do you think a USA account could be even better?

Tags: Personal Finances, tax free savings, universal savings accounts

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