The Skinny on Non-Retirement Household Savings Accounts

During this endless political season – I’m fine with about six months of campaigning instead of two years – there have been some behind-the-scenes mutterings about how to address America’s extremely low non-retirement household savings.

A solution to this dilemma, partial or otherwise, might help stem the ballooning dependence of many of our citizens on so-called government entitlements. Could such a solution be accomplished through the tax code without feathering the nest of those big birds in the upper branches of our national tree? Perhaps. In addition to encouraging non-retirement household savings, such a program might also address the income disparity between those upper branch big birds and the many smaller birds in the middle and lower branches.

Rainy Days, Indeed

According to a 2018 Federal Reserve study, the average American family has less than $11,000 in non-retirement household savings… few readily available financial resources to deal with an emergency. Why? Do they lack the ability... the motivation... the whatever… to create a “rainy day” fund? Yeah, I know, I blogged about rainy day funds back in July 2019, so let’s not cover old ground. But I would like to discuss one idea that is making the rounds among Trump economic advisers should his administration serve a second term.

What’s The Plan?

Who might be the target of these non-retirement household savings accounts? Perhaps those American families who occupy the lower- and middle-income branches earning as much as $200,000 a year. How’s that for attempting to reduce the usual clamor of “tax cuts for the millionayes and billionayes”? So, how is this proposition different from existing retirement plans, you ask? It has some similarities and some distinct differences. The non-retirement household savings account would allow eligible families to sock away up to $10,000 per year pre-tax in a savings fund. A popular suggestion is that the money be invested in low-cost stock index funds, which would minimize risk through diversification. Sound familiar? These features would expand ownership of stock to all participants, allowing millions more folks to share in future stock market gains. These features would not only help reduce the wealth inequality between the big and small birds, they would also enable many more of the smaller birds to enjoy The Amazing Power of Compounding.

What's The Difference?

This non-retirement household savings account would, of course, be voluntary in nature and employers would be encouraged to match employee contributions. After an accumulation period of five years, funds in the plan could be used for virtually any purpose: to supplement income in the event of job loss; for all emergencies; to buy or improve homes; to start a new business; to send kids to college and/or to private or tech schools; and yes, even for retirement. In short, this type of plan is not meant to be restrictive of use; rather, it’s purpose is to encourage non-retirement household savings.

“Too Familiar” Tax Feature

There would be one very familiar feature. It’s well-known that Uncle Grabby (IRS) gets grumpy when he loses revenue. As with distributions from pre-tax contribution retirement accounts, Grabby would recapture tax revenue delayed by contributions to these household funds when the money is finally withdrawn and spent. In short, and as usual, Grabby would get his pound of flesh by taxing those pre-tax contributions – and the dividends and capital gains they earn – when the money is finally withdrawn. But withdrawal is not a requirement.

In Summary

These tax-affected non-retirement household savings could well be a major step toward replacing the entitlement culture with incentives to save for broad-based wealth creation – I call ‘em fat and sassy, tax-advantaged rainy day funds. And they would certainly be better than another proposition being circulated by certain “Deep State” forces – a plan to eliminate the existing pre-tax contributions to retirement plans and go “all in” on Roth-type plans. In short, under this troubling proposition, all monies contributed to retirement plans would be after-tax dollars. No pre-tax dollars allowed. I’m a firm believer in Roth plans, but it’s sure nice to have the choice of paying taxes now or paying them later.

A Virus Note

Since 1994, 10 major health issues – Zika, SARS, avian flu, etc. – have significantly impacted global markets. In eight of those cases, stocks climbed more than 10% after 12 months once investors properly evaluated the threat. Since 1946, there have been 26 market corrections of at least 13%. On average, it has taken about four months to recover to pre-correction levels (Source: Adena Friedman, President and CEO of Nasdaq, Inc). Panic if you must, but patience might serve you best. Just remember, big market declines are unsettling. Usually they’re linked to some totally unexpected global event – a time, perhaps, to re-assess your “true” risk tolerance. If you’re very uncomfortable with today’s events, you might want to consider a different asset allocation once the market recovers…and it will. We just don’t know when.