It's time for Tax-Free Savings Accounts

Canada’s TFSAs are like Roth IRAs—but supercharged. Citizens may deposit up to $5,500 after-tax each year, and all account earnings and withdrawals are tax-free. However, unlike Roth IRAs, funds can be withdrawn at any time for any reason with no penalties or taxes. Another feature: The annual limit on a contribution carries over from year to year if a citizen doesn’t reach it. So if a Canadian contributes $2,000 this year, he can put away up to $9,000 next year ($3,500 plus $5,500).

There are other attractive features: Unlike in a Roth, there are no income limits for individuals contributing to a TFSA, and there are no withdrawal requirements at retirement. The accounts can be opened easily at any bank branch or online. They can hold bank deposits, stocks, bonds, mutual funds and other types of assets.

There are several reasons the U.S. is primed for its own TFSA. The first is legislative: Creating such an account would not be difficult for lawmakers, certainly not compared with revamping the whole tax system. Congress can simply expand eligibility and lift limits on the Roth IRA format.

We believe this new tax vehicle—call it the Universal Savings Account—would be so attractive that Americans would select it over education savings accounts or traditional programs, especially if its annual contribution limit is $7,000 or $8,000, which is higher than the current $5,500 for Roth IRAs.