Savings Account Showdown: USA vs High-Yielder
Tax-Free Savings Plan Proposed by Congress: A Potential Superior Option Over High-Yield Savings Accounts?
Last week, Sen. Ted Cruz (R-Texas) and Rep. Diana Harshbarger (R-Tenn.) dropped a bombshell with the proposal of the Universal Savings Account (USA) Act. This piece of legislation could revolutionize savings for Americans by introducing a new tax-advantaged account that lets you save tax-free. If it passes, you'll be able to make annual contributions to a USA, where your hard-earned cash can grow without being taxed.
Sounding familiar? You might be thinking of a Roth IRA, that retirement fund where you can stash away money that grows tax-free. But unlike a Roth IRA, which doesn't let you touch your savings until age 59-1/2 without a penalty, a USA allows withdrawals at any time, regardless of your age.
The money you put in a USA will be after-tax dollars, just like a Roth IRA. But unlike the latter, there's no need to wait to reap the benefits. The USA Act sets a maximum contribution of $10,000 in the first year, with annual increases of $500 until it hits $25,000. In contrast, the most you can put in a Roth IRA in 2025 is $7,000 ($8,000 for those age 50 and up). And here's the kicker: the USA Act doesn't tie eligibility to income limits, unlike Roth IRAs[1][2].
So, how does a possible Universal Savings Account stack up against today's best high-yield savings accounts? As always, the answer is: it depends. Let's say you're scoring a sweet 4% with a high-yield savings account. Since the interest you earn from the bank would be taxed as regular income, you'd actually end up with less than 4% after taxes. The amount you keep back depends on your tax bracket, which can vary based on your taxable income[1].
If you're in the 22% tax bracket, for instance, you'd keep 78% of your interest earnings (100% minus your 22% tax rate). That means your net interest rate would be around 3.12%. But if you can squeeze out close to the same rate with a USA, or you're in a very high tax bracket, then a USA's tax savings will pay off[1].
Remember, USA contributions are after-tax dollars, so you won't get a tax deduction for your contribution. But the tax break comes from not having to pay taxes on your earnings. If you're in a lower tax bracket, like 10%, your after-tax rate would be almost the same as the taxable high-yield savings account. But if you're in a higher bracket, like 37%, a USA's tax-free status could make a significant difference in your after-tax returns[1].
The real winner here is flexibility. You can benefit the most from a USA if you're able to put money aside and not touch it for a while, allowing you to invest your money for bigger gains. Unlike high-yield savings accounts, USAs could allow purchases of stocks, bonds, and more, offering much larger gains over time. Remember, though, this type of investment is not recommended if you want short-term access to your funds[1][2].
For now, the ball's in the court of the U.S. Congress. While we wait for their decision, it's a good idea to make sure you're earning a competitive return on your money in the bank. Keep your eyes on our daily rankings of the best high-yield savings accounts and CDs to make the most of your cash[1][2][4].
- In the realm of personal finance, the Universal Savings Account (USA) Act could potentially introduce a new avenue for investing, as it allows for the purchasing of tokens in the form of crypto or other investment tokens, given the ability of USAs to buy stocks and bonds.
- If the USA Act passes, it would offer an alternative to traditional investing methods, such as buying ico (initial coin offerings) for those who are aiming to diversify their portfolio and grow their wealth beyond what high-yield finance might provide.
- In light of the potential tax benefits and the possibility to invest in various assets, the USA could transform the way Americans approach their personal-finance investing, enabling them to make strategic decisions in the world of finance and business, both within and outside the confines of high-yield savings accounts.
