CHRIS EDWARDS, CATO INSTITUTE
A tax reform is spurring a savings revolution in Canada. Amity Shlaes and I wrote about Canada's Tax-Free Savings Accounts (TFSAs) in the Wall Street Journal in August. We think that such accounts would be a fantastic policy reform for America. They would simplify the taxation of savings, encourage families to save more, and spur stronger economic growth.
Toronto firm, Investor Economics, has released new data confirming the popularity of TFSAs. In just the past year, TFSA account assets increased 34 percent, and the number of accounts increased 16 percent. In June 2014, 13 million Canadians held $132 billion in TFSA assets. Given that the US population is about 10 times that of Canada, it would be like 130 million Americans pouring $1.3 trillion into a new personal savings vehicle.
The chart shows the rapid growth of TFSAs since they were introduced in 2009:
There are 27.7 million Canadian adults, so about 47 percent of them own a TFSA, according to the data from Investor Economics. A 2013 survey by a bank found a similar figure of 48 percent. In just five years, TFSAs have become the most popular savings vehicle in Canada, outstripping the Canadian version of 401(k)s. TFSA growth is expected to continue, and the accounts may soon play a central role in virtually every family's financial planning.
The American vehicle most similar to the TFSA is the Roth Individual Retirement Account (IRA). But Roths are far inferior, and thus just 16 percent of US households own them. Indeed, just 38 percent of US households hold any type of IRA, even though these accounts have been around a lot longer than TFSAs.
TFSAs are like supercharged Roth IRAs. Here are some of the key features:
- Individuals can deposit up to $5,500 after-tax each year. Annual contribution limits accumulate if you do not use them. So if you contribute $2,000 this year, you will be able to put away $9,000 next year ($3,500+$5,500).
- All account earnings and withdrawals are tax-free.
- Withdrawals can be made at any time for any reason with no penalties or taxes. That greatly simplifies the accounts and increases liquidity, both of which encourage added savings.
- There are no income limits and no withdrawal requirements. All Canadian adults can contribute and withdraw at any time during their lives.
- TFSAs can be opened at any bank branch or online. They can hold bank deposits, stocks, bonds, mutual funds, and other types of assets.
- TFSAs are great for all types of saving, including saving to buy a home, a car, or to start a business, and saving for health expenses, unemployment, or retirement.
Why are we letting Canadians have all the fun? Everyone agrees that Americans don't save enough, so why don't we kick-start a home-grown savings revolution with a US version of TFSAs? Former Treasury official Ernest Christian has long championed similar accounts, which he and I call "Universal Savings Accounts (USAs). Canada has now run the real-world experiment on such accounts, and it has succeeded brilliantly.
TFSAs, or USAs, are a better way to handle savings in the tax code. Currently, many people are scared off by the complexity of US savings vehicles and by the lack of liquidity in retirement accounts. TFSAs solve these problems. Members of Congress and presidential aspirants for 2016 who are interested in a popular, pro-growth, and pro-family reform to champion--this is what you are looking for.