While the notion of universal children’s savings continues to receive serious consideration at the highest levels of federal lawmaking, there is no formal plan on the table to promote CSAs and no guarantee that a plan will be adopted in the near future. Congress will need to consider a wide array of options before making a move on CSAs, a process that could take years. In the meantime, there continues to be a big gap in the financial-services marketplace for parents who want to save for their children.
Representative Ruben Hinojosa (D-TX) has an idea to fill that gap. Last week he introduced the Roth Accounts for Youths Savings, or RAYS, Act (H.R. 4129), which would allow parents to contribute to Roth IRAs on behalf of their children. While the mere ability to open accounts and receive contributions may seem minor compared to proposals to create universal, progressive children’s savings accounts, the RAYS Act would be a move in the right direction. It would remove barriers to saving for children and open new opportunities for both families and child savings programs like the Kindergarten to College (K2C) plan in San Francisco to get kids into the habit of saving.
The existing marketplace of tax-preferred savings options fails to provide parents with accessible, flexible options to save for their children and set them on a path to long-term success. Currently, the only tax-preferred savings vehicles to save for non-working children are 529 College Savings Plans and Coverdell Education Savings Accounts. Yet less than 3 percent of U.S. families own assets in either of these accounts.
The RAYS Act would provide an accessible and flexible mechanism for promoting savings, economic mobility, and increased college achievement beginning shortly after birth. The funds contributed into these accounts would be accessible throughout life to pay for education, a down payment on a house, financial emergencies, and retirement. Because they build on a familiar savings vehicle, the Roth IRA, Roth Accounts for Youth (RAYs) would be available from existing financial service providers with whom families may already have relationships. These accounts create an opportunity for families, communities, and other actors to invest in the well-being of kids by facilitating savings early in life.
In addition, as proposed in Rep. Hinojosa’s RAYS Act, these accounts would not create a new tax shelter for wealthy families or add additional strain on the federal budget. The contribution limit to a child’s RAY is linked to the parent’s existing limit, allowing only as much in contributions to a RAY as the parent wishes to defer from his or her own IRA limit in a particular year.
Obviously, the RAYS Act isn’t a panacea. Uptake is fully voluntary, which, as we know from the research, means that the accounts would likely be underutilized by low-income households. And while the tax benefits associated with the Roth IRA are often considered to be more equitable than those associated with the traditional IRA, they still confer greater benefit on wealthier households. How do we know? One indication is that only 8 percent of families making less than the national median income own a Roth. Besides the tax benefits, there is no additional incentive created by the RAYS Act for struggling families to contribute to a Roth, and we know that tax benefits alone are not enough to incentive savings among lower-income households. A policy like the Financial Security Credit, which is designed to provide targeted incentives to save for low- and middle-income families, would make the small changes made by the RAYS Act much more powerful. Still, many families could benefit from this new mechanism for saving, and newly accessible Roth Accounts for Youth could also provide existing CSA programs like K2C and Cuyahoga County College Savings with a flexible alternative to basic bank accounts or 529s as vehicles for supporting savings.
The importance of saving money for the future should be a lesson all Americans learn in childhood. The RAYS Act would create a new opportunity for families to instill the habit of saving for the long-term in America’s youngest citizens.