Spotlight on a Fresh Take on Tax-Free Savings: USAs vs High-Yield Accounts
Revised Tax-Free Saving Strategy Proposed by Congress: Outperforming Traditional High-Interest Saving Accounts?
In the ever-evolving world of savings, a new player is being introduced to shake things up - the Universal Savings Account (USA), proposed by Sen. Cruz and Rep. Harshbarger. This legislation aims to offer a tax-advantaged account that allows all Americans to save pre-tax dollars that grow without being taxed. More Info
If passed, this account would provide the same tax benefits as a Roth IRA but would be more flexible, allowing withdrawals at any age without penalty. That being said, is a USA better than a high-yield savings account? The answer depends on returns and tax brackets.
USA vs. High-Yield Savings Account: A Closer Look
Here is where the two savings options diverge:
- Diana, a personal finance expert, believes that the Universal Savings Account (USA), proposed by Sen. Cruz and Rep. Harshbarger, could challenge high-yield savings accounts due to its tax-free growth potential.
- In comparing the USA's taxation on interest to high-yield savings accounts, if you earn 4% in a USA, you keep the entire 4% tax-free, whereas, in a high-yield savings account, taxes might reduce your after-tax interest rates.
- Ranking the interest rates, many high-yield savings accounts currently offer rates between 4.40% and 5.00% APY, whereas the USA's rates are yet to be specified.
- According to the business proposal, USA's contribution limits start at $10,000, increasing annually until reaching a maximum of $25,000, whereas high-yield savings accounts typically have no specific contribution limits.
- If you are in a high tax bracket and prioritize tax efficiency, the USA might offer a better after-tax return due to the tax-free interest advantage. However, if you are in a low tax bracket and prioritize higher current interest rates from high-yield accounts, the latter might be more appealing.
