Are New USA Plans a Boon to Savers? Bloink & Byrnes Go Thumb to Thumb

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Robert Bloink and William H. Byrnes Robert Bloink and William H. Byrnes

One of the pieces of legislation making its way through Congress currently contains a proposal to create a type of universal savings account (USA) that would allow taxpayers to contribute after-tax funds to an account that would permit tax-free distributions, similar to the way distributions from a Roth IRA are treated.

These accounts are designed to encourage saving because, unlike other types of retirement-specific tax-preferred accounts, USAs allow savers to withdraw funds at any time after the contribution is made.

(Last week’s Thumb to Thumb: Was It Right to Kill the DOL Fiduciary Rule?)

We asked Professors Robert Bloink and William Byrnes, who are affiliated with ALM’s Tax Facts, and hold opposing political viewpoints, to share their opinions on the new universal savings accounts. Byrnes thinks that the accounts will provide a valuable incentive for individuals to save more, both for retirement and general emergencies, while Bloink views the accounts to be yet another tax savings tool for the very wealthy, and thinks that automatic IRAs (“auto-IRAs”) would be a much more valuable introduction for a much larger population group.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Byrnes:  YES

Bloink:  NO

Their Reasons:

Byrnes: Introducing universal savings accounts is a great idea. Far too many people don’t save for retirement or for the future because retirement accounts impose penalties for early withdrawals, meaning that if the individual saves for retirement, he or she may not also be able to access those savings in an emergency. Lack of access is a powerful disincentive to savings that the universal savings account model would fix.

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Bloink: The savings disincentive Professor Byrnes describes might be there, but the universal savings account is not going to generate the type of savings that we need. As currently drafted, the universal savings account rules will do little more than encourage wealthy taxpayers to shift savings from taxable accounts into these tax-preferred vehicles in order to escape paying taxes on the account’s earnings over time.

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Byrnes: Universal savings accounts have no income limits because they’re designed to provide a savings tool for everyone. I can’t see the negative in introducing a new tax incentive that encourages people to be responsible and save for the future.

Bloink: The middle class would be much better served by an auto-IRA model.  The fact is, the group of lower and middle class taxpayers that need a new incentive to save are probably not paying attention to this $2,500 annual savings option. Further, they would be better served (for the future) by an account that prevents pre-retirement leakage.  An auto-IRA model would provide a savings plan that people don’t have to think about, that is completely taken care of at the employer level so that at retirement, these people aren’t relying solely on Social Security for income.

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Byrnes: The entire point of the universal savings account is that it allows for “leakage”, as Professor Bloink puts it.  Lower and middle class taxpayers do not want to lock their limited funds up in an account that they can’t access without penalty for 30 years.  The annual contribution limit may be low, but savings add up over time—the bottom line here is that some savings are better than no savings.

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Bloink:  It’s wrong to think that simply presenting this additional savings option is going to make lower and middle income taxpayers save more.  We’re already inundated within savings account options—401(k)s, IRAs, HSAs, 529 plans—for every type of contingency. If the eventual point of the universal savings account is to encourage long-term savings, it’s not going to work.  The structure has to be automatic, so that taxpayers have to affirmatively opt out of the plan, as in an auto-IRA.

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