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Tax Policies to Encourage Saving and Help Even Out the Unfairness of Our Existing Government Policies?

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In the last few days I've seen more commentary on this issue of how the government should not forget savers and retirees who are having to deal with record low interest rates. Here's an excerpt from a recent commentary from MarketWatch's chief economist:

Since the banks are apparently in good financial shape, it's time for the Fed to consider the needs of the silent majority -- the nation's savers -- and raise rates so that they can become healthy, too

I published Notices of two related articles over the weekend from the Boston Globe. The first article described the difficult environment that exists for those who live off their interest income:

With significant rate hikes probably a long way off, conservative investors face a difficult choice: Cope with reduced income or choose riskier options with potential for better gains.

The other Boston Globe article was a commentary that suggested three tax policy changes that would encourage more saving and discourage debt. The author also noted the problem with our current system:

our totally unrepentant financial system is being rebuilt while savers are punished with yields that guarantee their savings will lose purchasing power.

His three suggestions would definitely help lower the tax burdens for savers and retirees. However, I'm not sure if they would have a chance of getting broad support. Wouldn't it be better to push for a small change that could at least have a realistic chance of receiving broad support?

With the idea of a small change with some chance of getting broad support, I came up with two small tax policy changes of my own:

  1. Remove the qualifying income requirement for IRA contributions - Currently, only compensation income is allowed for IRA contributions. This would be an easy way to help retirees. They would be able to contribute to Roth accounts with money from either their pensions or interest income. For Roth accounts, that money would then grow tax free.
  2. Start a Tax-Free Savings Account (TFSA) program - Canada started a TFSA in January 2009. It's like a Roth account in that any interest or gains is tax free. Unlike a Roth account, it's not just to help people with retirement savings. Money can then be withdrawn at any point of time, without penalty. It shouldn't have a major impact on tax revenue since there's a cap of $5K per year in contributions (will be indexed with inflation).

The above ideas are not major changes, but they would encourage savings and at least give a little reward to savers. They're practical in that they wouldn't be a major hit on tax revenue. Do you think they would have a chance? Do you have any suggestions? If you do, please share them in the comments.



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Comments
11 Comments.
Comment #1 by me1004 posted on
me1004
Here here! Banking Guy for president! Both of those ideas sound good. Too bad no one in politics is pushing such through.

Another thing. They allow only about $5,000 a year of earned income to be put into IRAs. If you miss a year -- or 20 -- you don't get to make that up! I made a bad mistake. I figured early on that it was not good to put money into an IRA until I first got enough together to buy a house. Well, for various reasons, the house bit never got done. So, I went through 20 years of no deposits into an IRA, and paying taxes on the interest income all along!

I now have hardly anything in an IRA and no opportunity to deposit for the years I missed -- which could be most of $100,000 into an IRA. Instead, my money is in taxable accounts! It just seems unfair to me that I am being taxed for that money when so many other people are not because their circumstances were such that they could make the deposits all those years that I did not.

I can't deposit anything in an IRA from my interest income. And I've been laid off, so have no earned income -- for quite some time now! I am going for more years now unable to put money into an IRA, while continuing to pay taxes on my interest income, although I have money on hand (what was put aside for a house) that I could put in an IRA if they just allowed me to.

I propose allowing the annual limit to be cumulative, so if you miss a few years, you can put that missed income in at any time thereafter. That seems only fair to me. That would allow me to move nearly $100,000 into an IRA at this time, and thus now start getting the same tax treatment as everyone else! And the government would still be better off because I will have paid taxes on that income all along that I belatedly got into an IRA.

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Comment #2 by Anonymous posted on
Anonymous
>> MarketWatch's chief economist: Since the banks are apparently in good financial shape, it's time for the Fed to consider the needs of the silent majority -- the nation's savers -- and raise rates so that they can become healthy,

 

Alas ... I'm afraid the chief economist is mistaken.

The dual mandate that FED has is made up of: 1) Price Stability 2) Full Emploment. The prices have (somewhat stabilzed), but unemployment remains a major issue.  Therefore counter to what the chief economist believes, the Federal Reserve is right on the path of doing its job and is attacking the issue of unemplyoment with exceptionlly low interest rates for an extended period.

Err ... there is not such thing as "consideration of nation's savers" in the mandate that we've given to the Federal Reserve.

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Comment #3 by Anonymous posted on
Anonymous
>> The above ideas are not major changes, but they would encourage savings and at least give a little reward to savers. They're practical in that they wouldn't be a major hit on tax revenue. Do you think they would have a chance? Do you have any suggestions? If you do, please share them in the comments.

 

Indeed ... these ideas might be helpful, and I have two suggestions:

1) Variable Annuities: The variable annuity is not exctly identical to these ideas, but it have some features that offer benefits of tax-deferred growth, and there is no cap to the amount of monies that one can invest.

2) Structured CDs: The savers might also want to look into the Structured CDs that are FDIC isured to put some of their assets into which have a potential of large growth that might be well beyond what a traditional CD will offer.

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Comment #4 by Anonymous posted on
Anonymous
It's great to read articles talking about giving a break to savers.     I don't believe they will do anything for savers and if they do, it willl have a catch.   The truth of the matter is that our Congress -- both Democrats and Republicans, but probably more so the Democrats look for ways to penalize anyone who either makes a good salary or has a decent sized IRA.   When the seniors  take distributions they will be hit with penalties not readily apparent to the average Joe especially for a single senior with income of $85,000 or more (they will penalize you via the cost of Medicare Part B with an additional premium-you can check out www.ssa.gov for the details) and if the Democrats get the Senate healthcare legislation passed,  that income threshold amount will be frozen for ten years (courtesy explanation by www.cch.com - Page 6 of the explanation of proposed senate healthcare insurance bill) and any single senior with income over that amount will be paying much higher premiums for his Medicare Part B insurance through the year 2019.   And don't forget Alternative Minimum Income Tax may find a way to take some of your hard-earned savings interest as well. 

So having lived a long time and gone through stock market fluctuations and putting funds into IRAs, I can tell you if I had it to do over, I would save through a regular taxable account, pay long term capital gains tax on any gains and be done with the government micromanaging my life by hitting me and others like me with penalties on our Medicare Part B insurance and paying Alternative Minimum Income Tax.

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Comment #5 by Anonymous posted on
Anonymous
While these are good ideas, they would not help the many retirees, myself included, subject to little or no income tax due to the bulk of our income coming from non-taxable Social Security benefits, but who also depend on interest from savings.

What would help me and others in my situation is higher (real) interest rates. I lost hundreds of dollars per month after a 5% CD came due and I invested it at 3%.

By the way, thanks for your great site; much appreciated!

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Comment #7 by jojo (anonymous) posted on
jojo
Unfortunately the federal reserve does not want people to save money and is doing everything in their power to encourage spending and debt. The present system of (fiat) fraction reserve currency is desperate for velocity which is the movement of money, savings is stagnant. So don't hold your breathe for some solution and/or scheme. The only solution is to raise interest rates. IMHO.

7
Comment #8 by Anonymous posted on
Anonymous
.

 

>> Making things deductible like interest income,

>> charitable donations, etc really benefit people

>> in higher tax brackets disproportionately

 

Really ... How so?

The people in higher tax bracket, pay disproportionately higher taxes to start with. So what's the big deal if they get tax deduction when they give monies to charities which ultimately benefit people in lowest of the tax bracket?  ... Well?

 

.

3
Comment #9 by Anonymous posted on
Anonymous
.

 

>> How about just giving a dollar-for-dollar tax

>> credit for the first $1000 in savings for people

>> who make less than $65000/yr (25% tax bracket). 

>> Or make the first $2k in interest income tax free for same group.

 

Hmm ... quite an idea (not)!

So how much will be the hit that the federal government will take as a result of this tax-break? ... And as a consequence, how many programs funded thru federal government be cut?  And how many jobs will be lost?

 

.

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Comment #11 by Anonymous posted on
Anonymous
Neither FEDs nor Congress will do anything nor they have inserntive to raise the rates,

Stop dreaming about it!

2
Comment #12 by Anonymous posted on
Anonymous
IRA is not good. I started IRA over 10 years ago and I am still in the red because I bought stocks. In fact, my (continuous) investments on S&P 500 also return with a very low yield because of the market crashes.

I am not asking for much. I just hope that they could lift the $5000 (or $10K if you are willing to jump thru hops to buy paper) limit on Savings Bond. I am sure they can do that. If I can buy $50,000 I-Bond per year. I would be quite happy. I-Bonds are standing at 3.36% right now. That's much better than many 12-month CDs even if the next 6 months are 0%.

4
Comment #13 by Anonymous posted on
Anonymous
To commenter #8- you wrote--The people in higher tax bracket, pay disproportionately higher taxes to start with

After $106,000 of income there is no more SS tax. So those making more than $106,000 immediately get a 6.2% reduction in their taxes and 12.4% reduction if they are self-employed.

1