Chris Edwards point out that Canada and Britain have expanded theirs.
Let’s look at Canada first. Prime Minister Stephen Harper’s government implemented Tax-Free Savings Accounts (TFSAs) in 2009, and they are creating a broad-based savings revolution north or the border.
Britain’s Individual Savings Accounts (ISAs) are just as impressive as the Canadian accounts. All UK residents can put up to 15,240 pounds (about $23,000) per year of after-tax money into ISAs. ISA earnings grow tax-free and can be withdrawn at any time for any reason with no taxes or penalties. Like TFSAs, ISAs enshrine in the tax code the principle that saving for all reasons is important, not just for reasons favored by governments.
The controversy about TFSAs (and the higher limits this year) is the way they interact with other types of investments, primarily RRSPs (IRAs/401(k)s). The original intent was that retirement savings would be incentivized through generous tax exemptions, but the earnings drawn from them would then be taxed (after age 71, when people are required to start drawing them down). The TFSA now allows people over 71 to further reduce (“avoid”) income taxes. There are sound demographic reasons why many people should not feel like they are at death’s door at 71, but people concerned about government revenue see this as a massive starve-the-beast play.
Government revenue and starve-the-beast-considerations I’d put way down the line behind questions like “what are savings?” and “what is taxation?”
Maybe we could even get to questions like “how do progressive tax brackets impact incentives in recessions?” Some where down the line we’d probably figure out if savings actually increase net present tax revenue.
This seems like a pointless worry to me. People who are saving after tax money have already paid their highest marginal rate on those dollars. If they invested tax free and then withdrew (and paid taxes) after retirement only, they’d likely pay a lower marginal rate given their lower post-retirement income.
This is the reason, BTW, that I’m not a fan of Roth IRAs and would NEVER do Roth conversion of a traditional IRA — why on earth would I want to pay my highest taxable rate on those savings now when I can wait until retirement and withdraw the funds at a much lower tax rate? And that’s not to mention that I’ll have the opportunity to change my residence to a warm, no-income tax state at that point and save another 5% of the tax bill.
Because you can in-effect invest more money with the Roth.
That may be a reason to add some money to a Roth after you’ve already maxed out your IRA/SEP contributions. But it’s not a reason to contribute to a Roth instead of a pre-tax account (or to do a conversion of a pre-tax account to a Roth).
Doesn’t mean very much in a ZIRP world.
I did a Roth conversion of a traditional IRA, primarily for three reasons: the Roth doesn’t have to be drawn down on a set schedule and I like that flexibility; I predict that actual tax rates will rise and thus in my post-retirement life the supposed lower taxes which give the advantage to the traditional IRA won’t actually be lower; I think there is a significant chance that the rules on IRAs will be changed adversely and, being post-tax, the Roth accounts might get better treatment.