THE UNIVERSAL SAVINGS ACCOUNT

The recent “House GOP Listening Session Framework – Tax Reform 2.0” released by the Ways and Means Committee once again brings up the idea of a “USA” account, calling for “Creating a new Universal Savings Account to offer a fully flexible savings tool for families”.

The idea of a Universal Savings Account, or USA, not described in detail in the Ways and Means release, is not a new one.  I think it was first proposed during Dubya’s tenure.

Here are my thoughts on what a USA would be from my tax reform recommendations discussed in “The Tax Code Must Be Destroyed” -

“I would replace the current IRA, HSA, MSA, ESA, and Section 529 plan tax-deferred savings accounts with one all-encompassing USA (Universal Savings Account).  ALL taxpayers, without exception, could contribute up to $10,000 per year.  Contributions would be fully deductible and there would be no tax on earnings for qualitied withdrawals. 

Distributions made before age 62 for education costs, medical expenses or to purchase a first home (only one first home per lifetime) would be considered qualified withdrawals.  There would be no penalty on non-qualified withdrawals after age 59½, but earnings would be taxed; all withdrawals after age 62 would be considered qualified.   

While there would be NO taxation of earnings on qualified distributions from the 'traditional' USA, there would still be a required minimum distribution (RMD) beginning at age 72 - but on only 50% of the account balance.  And ALL beneficiaries, not just spouses, could roll-over the entire amount of an inherited account into their own USA and NOT have to take any RMDs until age 72 themselves.  With the ROTH option, all distributions after age 62 would be totally tax free, as contributions were not deductible, and there would be no RMD requirement and no tax on any withdrawals by a beneficiary.

All existing accounts – IRA, HSA, MSA, ESA, Section 529, etc. – would be automatically converted to a USA by the Trustee.  Taxpayers could consolidate individual USA accounts from the same or different Trustees via rollover without any tax consequences.”  

And on the business side -

“All current employer and self-employed retirement plans – 401(k), 403(b), 457, SEP, SIMPLE, KEOGH, etc. - would be replaced by an RSA (Retirement Savings Account).  Employers could elect to contribute up to 25% of wages annually, up to a maximum of $25,000, and all employees could elect to contribute up to $25,000 of wages annually.  There would be no requirements for either to contribute.  There would be 'traditional' (employee contributions 'pre-tax') and ROTH options (employee contributions 'after-tax', all qualified distributions totally tax free, and no RMD requirement).  Self-employed individuals could contribute up to 20% of their adjusted earnings from self-employment, up to a maximum of $25,000.

All existing employer and self-employed retirement accounts would be automatically converted to an RSA by the Trustee.  Taxpayers could roll-over any RSA to a Universal Savings Account (USA).”

And -

“Required Minimum Distributions (RMD) would be required to begin from a 'traditional' RSA at age 72 but based on only 50% of the account balance.    And ALL beneficiaries could roll-over the entire amount of an inherited RSA into their own USA and NOT have to take any RMDs until age 72 themselves.   With the ROTH option, all distributions after age 62 would be totally tax free, as contributions were 'after-tax', and there would be no RMD requirement and no tax on any withdrawals by a beneficiary.”

So, what do you think?

TTFN