I would also replace all of the various retirement savings options for self-employed taxpayers (i.e. Keogh, SIMPLE. SEP, etc) with one SERSA – “Self-Employed Retirement Savings Account”.
All taxpayers could contribute up to the lesser of $10,000 or total earned income to a Universal Savings Account. This $10,000 maximum would be indexed for inflation.
There would be a “traditional” USA and a ROTH USA. There would be no restrictions on the ability to contribute to either option. A taxpayer, regardless of his/her level or income or current coverage under an employer plan, could elect to contribute to a “traditional” USA and claim a tax deduction, elect to contribute to a ROTH USA with no current deduction but all withdrawals after age 59½ being totally tax-free (subject to the same current 5-year rule), or elect to split the maximum allowable deduction between the two options.
There would no income tax or premature withdrawal penalty on withdrawals of any amount at any time from a “traditional” USA that are used to pay for qualified post-secondary education (including room and board) or medical expenses (including health insurance premiums). There would be income tax on “unspecified” withdrawals, with a 10% penalty for “unspecified” withdrawals made prior to reaching age 59½, except for death or disability.
In the case where there is a “tax basis” in a traditional USA (resulting from non-deductible contributions to IRAs made prior to the effective date of the new Code) withdrawals would be considered to come from “tax basis” first. If a taxpayer had a “tax basis” of $10,000 in a traditional USA and withdrew $15,000, only $5,000 would be subject to income tax, unless used for qualified education or medical costs. If the taxpayer withdrew $6,000 there may be a 10% premature penalty assessment, depending on the taxpayer’s age and what was done with the money, but there would be no income tax. Withdrawals for qualified education and medical costs would not reduce “tax basis”.
A self-employed taxpayer could contribute up to the lesser of the current maximum contribution, including “catch-up”, allowed for a 401(k) or 403(b) account or “net earnings from self-employment” to a “Self-Employed Retirement Savings Account”. Employees of the self-employed business could also elect to contribute up to the maximum to their own RSA (established like a current IRA) as part of the business’s SERSA plan, with their contribution reducing taxable federal wages on the W-2.
There would be a “traditional” SERSA and a ROTH SERSA, and all self-employed taxpayers, and their employees, could split their deduction between the two options in any way they so choose regardless of income.
A SERSA plan would have to be established before the end of the calendar year, so that any employees could be notified of its availability and could chose to contribute via payroll deduction. But the owner’s contribution could be determined and deposited up to the due date of the return, including extensions. The owner would not, under any circumstances, be required to make any contribution for himself/herself.