On the first day of May, Senator Ted Cruz of Texas and Representative Diana Harshbarger of Tennessee proposed the Universal Savings Account (USA) Act. This legislation seeks to establish a new kind of tax-advantaged account that would enable all Americans to deposit money into savings, allowing it to grow tax-free.
If the mention of tax benefits rings a bell, it's probably because you're reminded of a Roth IRA, a retirement fund, where your money can grow tax-free, up to a certain annual limit. However, a distinctive feature of the USA compared to a Roth IRA is that you can withdraw your funds at any time, irrespective of age, without penalty.
Like a Roth IRA, contributions to a USA would be made with post-tax dollars, implying no tax deduction can be claimed on your contribution. Instead, the tax benefit comes from the exemption of your earnings from taxation.
The legislation's current draft provides for a larger contribution limit for a USA than a Roth IRA. The USA Act sets the maximum contribution in the first year at $10,000, raising it by $500 each year until it reaches a maximum annual limit of $25,000. For comparison, the highest contribution to a Roth IRA in 2025 is projected to be $7,000 (or $8,000 for those aged 50 or older).
Additionally, the USA Act doesn't impose any income limits for eligibility, unlike the Roth IRA rules, which start to phase out eligibility once individual tax filers attain a modified adjusted gross income (MAGI) of $150,000 or a couple filing jointly reaches a MAGI of $236,000.
Determining how a potential Universal Savings Account might compare with today's superior high-yield savings account depends on two factors: the return rate offered by a USA and your respective tax bracket.
To illustrate, if a standard high-yield savings account offers a return of 4%, the interest you earn would be taxed as a standard income, so your take-home would be less than 4%. The exact amount is influenced by your tax bracket. For instance, if you are in the 22% tax bracket, you would retain 78% of your interest earnings. This would translate to a net interest rate of 3.12%.
Understanding these calculations allows you to compare potential earnings from USA with a taxable high-yield savings account. For example, if a USA only yields 2.00%, you would be better off with a 3% taxable savings account that brings in over 2%, unless you fall into the 35% or 37% tax bracket.
You stand to gain the most from a USA if you're able to consistently deposit money without relying on it for a while, letting you invest for larger returns. Like Roth IRAs, USAs would permit the acquisition of stocks, bonds, ETFs, etc., facilitating more significant gains over time. However, this kind of investment is not advisable for funds you may need access to in the short-term.
Whether Universal Savings Accounts will come to existence and integrate into the tax code will be seen with time. In the meantime, it's wise to ensure you're getting a fair return on your bank deposits, facilitated by our daily national rankings of the highest bank deposit rates.