Universal Savings Accounts Can Fix 401(k) Leakage

More than 50 million Americanshold trillions of dollars in 401(k) accounts. The retirement accounts have been a big success. By eliminating the double-taxation of savings under the income tax, 401(k)s encourage individuals to build larger nest eggs.However, many people needing near-term cash end up withdrawing funds from their accounts or borrowing against their balances. Retirement experts are concerned about such “leakage.” But the real problem is that the system imposes paperwork burdens and penalties on people for accessing their own money.The solution is to create a savings vehicle that would allow withdrawals without a mess of rules, penalties, and paperwork. The solution is Universal Savings Accounts (USAs),as discussed in this Cato study.USAs would be the first tier of savings for individuals, with the funds available for any near-term expenses that may arise. For individuals that didn ’t end up needing the funds in the near-term, account balances would grow tax-free and help cover future retirement needs.Because USAs would allow withdrawals free of hassles and penalties, they would encourage more savings. The simplicity and liquidity of USAs would make the accounts popular across all age and income groups, which is the experience with similar accounts inBritain and Canada.TheWall Street Journal yesterday highlighted the 401(k) leakage issue:Annual defaults on loans taken against investors ’ 401(k)s threaten to reduce the wealth in U.S. retirement accounts by ...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs