By Chris Edwards, Amity Shlaes
Chris Edwards and Amity Shlaes
It’s only 2014, but politicians are already casting about for the magic tax vehicle they can ride to the White House in 2016. Most strategists agree that a plan to lift the financial pressure on the middle class will do the trick. All strategists agree Americans need to save more for their future.
Some Republicans are advocating a giant child tax credit, but there are more effective means for helping the middle class. One is a tax program already road-tested in the country whose populace most resembles our own, Canada.
It’s called the Tax-Free Savings Account and TFSA, as most Canadians refer to it, is a roaring success. Though these savings accounts were introduced only five years ago, 48% of Canadians have already signed up. That compares with only 38% of U.S. households owning any type of IRA—though IRAs have been around for decades. At the end of 2013 Canadians held $109 billion in assets in TFSAs. In an economy our size that would be the equivalent of $1 trillion.
“The autonomy these accounts offer to everyone will make families become—and think like—millionaires.”
So what is this Canadian savings account? The nearest U.S. equivalent would be Roth Individual Retirement Accounts. With a Roth, workers pay taxes on earnings before they put their cash into the account. The money then grows tax-protected, and people pay no tax when they withdraw it.
However, Roth accounts have numerous restrictions. You can’t open a Roth easily if your earnings are above certain limits: $191,000, for example, for a married couple filing jointly. You can’t withdraw cash whenever you feel like it, at least not without daunting penalties. So even when Americans have money to save, they often hesitate to stash it in a Roth.
Canada’s TFSAs are like Roth IRAs—but supercharged. Citizens may deposit up to $5,500 after-tax each year, and all account earnings and withdrawals are tax-free. However, unlike Roth IRAs, funds can be withdrawn at any time for any reason with no penalties or taxes. Another feature: The annual limit on a contribution carries over from year to year if a citizen doesn’t reach it. So if a Canadian contributes $2,000 this year, he can put away up to $9,000 next year ($3,500 plus $5,500).
There are other attractive features: Unlike in a Roth, there are no income limits for individuals contributing to a TFSA, and there are no withdrawal …read more
Source: OP-EDS
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