For some time now, the US has lagged behind the many 1st world economies in terms of personal savings. The French, for example save more than 3 times as much as their US counterparts even with significantly higher income taxes. Oddly, when economic downturns hit, personal savings rates in that country go up significantly, which seems to suggest that we spend when times are good and save when times are bad, seemingly 180 degrees out of phase. Maybe we can chalk it up to good old American exuberance, but Congress is preparing to help.
Tax Reform 2.0
When the return this fall, Congress will consider the next part of Tax Reform, Tax Reform 2.0. One of the proposed parts has to do with encouraging Americans to save more. For example, the rule for college savings plans, or Section 529 plans, might change to allow tax-free withdrawals to pay for apprenticeships to learn a trade or to pay off student loans. It might also pay for some home schooling.
The plan also seems to be leaning towards a new Universal Savings Account. Such an account would allow tax-free withdrawals for a variety of needs. These contributions would be made after taxes are already taken out, so they wouldn’t be taxed again for withdrawals.
It might be possible with Tax Reform 2.0 for individuals could take money out of a retirement account after a birth or adoption without penalty and other changes could make it easier for small companies to offer retirement plans and allow individuals to continue making traditional retirement contributions after age 70 and a half.
From all of these proposals, we can see the intent of the writers to make it easier for individuals to save, but there is also room in the proposals to let us spend, too. After all, personal savings aren’t stored up in a Scrooge McDuck vault, but are put into circulation in the form of loans and other instruments that ultimately help the economy. They are also meant to be spent when needed. Tax Reform 2.0 is a swing for the fences in terms of US personal savings and these initiatives might not survive the legislative process. It’s good to know, however, that folks in Washington recognize that this is worth talking about and, hopefully, addressing.