Tax-Advantaged Savings Accounts: Overview and Policy Considerations

Tax-Advantaged Savings Accounts: Overview and Policy Considerations

Tax-Advantaged Savings Accounts: Overview
March 31, 2023
and Policy Considerations
Brendan McDermott
Congress has created a variety of tax-advantaged savings accounts to encourage taxpayers to save
Analyst in Public Finance
for certain expenses. These accounts are some of the largest benefits administered through the

United States’ tax code. The first tax-advantaged savings accounts enacted were pensions and
retirement accounts such as 401(k)s, 403(b)s, and Individual Retirement Accounts (IRAs), which

remain the most widely held and well-funded tax-advantaged accounts. Households can also save
in tax-advantaged accounts for costs related to a relative’s education or disability-related expenses using 529 plans, Coverdell
accounts, or Achieving a Better Life Experience (ABLE) accounts. Taxpayers with high-deductible health insurance plans
can also save in tax-free accounts to pay for out-of-pocket health care costs using Health Savings Accounts (HSAs).
Impact on Saving
Despite the popularity of these accounts, evidence of their effectiveness at encouraging saving is mixed. Many studies
suggest that these accounts encourage little to no saving that would not have otherwise occurred in their absence. However,
limitations complicate these analyses. Other research indicates that tax-advantaged accounts encourage saving, but not
because of the tax advantage they provide. Rather, this research highlights that other “nontax” features of these accounts that
make saving simpler—such as automatic enrollment—may encourage saving more effectively than the tax advantage does.
Budgetary Impact
Tax-advantaged accounts cost the federal government revenue it would otherwise collect. Absent a reduction in spending or
increase in revenue elsewhere, they will increase the budget deficit (or reduce any surplus). The revenue impact of these
accounts may vary over time. Accounts that defer taxation on contributions and gains (e.g., traditional retirement accounts)
reduce revenue in the short run. Over time, when households withdraw these funds and pay taxes on their withdrawals, the
federal government may recoup some of this lost revenue. Accounts that exempt gains and withdrawals from taxation (e.g.,
Roth retirement accounts, 529 plans, ABLE accounts) will not reduce revenues in the short term, but will over time. State and
local governments that model their income taxes on the federal code may also offer tax advantages on these accounts and
therefore experience similar temporal changes in revenues.
Distribution of Benefits by Household Income
Higher-earning households are more likely to both own tax-advantaged savings accounts and have larger balances in those
accounts. Unlike lower-income households, who often need to spend a larger share of their income to pay for necessities,
higher earners are more likely to have disposable income to save. Tax deductions and exemptions are also worth more in
dollar terms to individuals in higher tax brackets than lower ones. However, savers withdraw and contribute to tax-
advantaged accounts over time, and the lifetime tax benefit of a tax advantage can depend on factors besides just the saver’s
marginal tax rate in the year they receive a tax advantage. In addition, tax-advantaged accounts are often only one component
of a broader collection of social benefits aimed at a particular issue such as retirement or higher education financing. Some
argue that measuring the regressivity of tax-advantaged accounts in isolation obscures the progressivity of the larger
collection of benefits serving a given population. These and other factors could influence whether policymakers decide to
alter existing tax-advantaged accounts or create new ones to address additional policy issues.

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Contents
Introduction ..................................................................................................................................... 1
The Tax Treatment of Savings ......................................................................................................... 1
Taxable Savings .................................................................................................................. 2
Tax Advantages on Savings ................................................................................................ 2
Equivalence of Pre-Tax and After-Tax Accounts to the Taxpayer ............................................ 4
The Saver’s Credit ..................................................................................................................... 5
Limitations on Qualified Contributions and Withdrawals ........................................................ 6
Description of Major Tax-Advantaged Accounts ............................................................................ 7
Impact on Saving ........................................................................................................................... 12
Research on the Impact of Tax Benefits of Tax-Advantaged Accounts on Savings................ 13
Early Work ........................................................................................................................ 13
Competing Research and Methodology ............................................................................ 14
Later Findings ................................................................................................................... 14
Effect of Other Features of Tax-Advantaged Accounts on Savings ........................................ 15
Findings from Behavioral Economics............................................................................... 15
Short vs. Long-Term Saving ............................................................................................. 16
Government Revenue .................................................................................................................... 16
Distribution of Tax Benefit by Income .......................................................................................... 17
Recent Proposals for Reform ......................................................................................................... 20
Change the Tax Benefit ........................................................................................................... 20
Alter or Expand Employer Contributions ............................................................................... 20
Change Limitations ................................................................................................................. 20
Retirement Accounts ......................................................................................................... 21
Health Savings Accounts .................................................................................................. 21
Create New Tax-Advantaged Accounts .................................................................................. 21
Conclusion ..................................................................................................................................... 22

Figures
Figure 1. Benefit of a Pre-Tax Account ........................................................................................... 4
Figure 2. Tax Deductions and Exemptions are Often Regressive ................................................. 18

Tables
Table 1. Tax Benefits of Selected Savings Accounts ....................................................................... 3
Table 2. Equivalence of Pre- and After-Tax Accounts ..................................................................... 4
Table 3. Description of Tax-Advantaged Accounts ......................................................................... 8

Contacts
Author Information ........................................................................................................................ 22
Congressional Research Service

Tax-Advantaged Savings Accounts: Background and Policy Considerations

Introduction
Lawmakers often use tax incentives to encourage or subsidize certain behaviors. For example,
Congress has tried to encourage households to save for particular expenses by letting them open
designated tax-advantaged savings accounts that qualify for special federal tax benefits. These
accounts reduce the tax liability that savers incur on their savings, and thus are a way for
Congress to subsidize the expenses.
The oldest class of tax-advantaged savings accounts are retirement accounts. Today, these include
Individual Retirement Accounts (IRAs) and a variety of employer-sponsored retirement accounts,
including those commonly known as 401(k)s, 403(b)s, and 457(b)s.1 In 2019, 50.5% of
households held retirement accounts. Of those with an account, the median value was $65,000,
while the average value was $255,200.2 Savers can also open tax-advantaged accounts to save for
a family member’s education or disability-related expenses, and some can open accounts to cover
out-of-pocket health care costs.
By limiting the use of these accounts to a particular activity such as higher education or
retirement, policymakers may hope these accounts encourage households to save for activities
that the policymakers view as socially beneficial. Encouraging saving may enable more people to
participate in the activity. Policymakers may also want to make participation more affordable for
all, including those who would have participated even without the benefit.
Further, increased saving may benefit the economy overall if new savings are invested in
activities that spur economic growth. Businesses may respond to savers buying stocks, bonds, or
other assets by investing more in their own capacity to produce goods and services. If tax-
advantaged accounts encourage new saving, they could encourage economic growth and
innovation. However, if the revenue loss from the savings incentives increases the deficit, these
programs could reduce national savings.3
Moreover, these tax advantages reduce the present value of current and future tax revenue, and
they typically benefit households with greater income and wealth more than they typically benefit
others. To evaluate the efficacy of these provisions and compare them to other policy options,
policymakers could measure the extent to which these programs generate new savings at different
income and wealth levels against their cost in foregone revenue.
The Tax Treatment of Savings
One way to understand the various tax benefits of tax-advantaged accounts is to compare them to
the tax treatment of taxable accounts. Unless otherwise specified by law, a savings account would
generally be considered a taxable account.

1 The popular names for these accounts are in reference to the sections of the Internal Revenue Code that authorize
them.
2 Neil Bhutta et al., “Changes in U.S. Family Finances from 2016 to 2019: Evidence from the Survey of Consumer
Finances,” Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, vol. 106, no. 5, p. 16,
September 2020.
3 Jonathan Huntley, The Long Run Effects of Federal Budget Deficits on National Saving and Private Domestic
Investment, Congressional Budget Office, Working Paper 2014-02, February 2014.
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Taxable Savings
If a saving or investment account has no explicit tax advantages (it is a taxable account), savers
will have to contribute to the account with income that would be subject to the income tax
already. The federal government will also tax any income the account generates over time. The
timing and tax rate on gains depends on how the taxpayer invested their savings.
Short-term capital gains (those from assets held for less than a year) are subject to the normal (or
“ordinary”) income tax rates, as are many dividends and interest earned from savings accounts
and bonds. For example, the interest earned on a standard savings account is subject to the same
tax rates as those that apply to earned income, such as wages and salaries. Households pay
income tax on the earnings of these accounts and investments every year when they file their
income tax returns.
Other earnings from savings—such as qualified dividends and long-term capital gains—are either
exempt from taxation or subject to lower or preferential tax rates. Additionally, the government
generally does not tax these assets until the year the underlying asset is sold. This process can
defer taxation until years after the investor first bought the asset.4 Capital gains on assets that a
decedent (i.e., deceased person) bequeaths to an heir are never subject to capital gains taxation.5
Additionally, interest on state and local government bonds is not subject to federal tax.
Taxpayers who earn net investment income and have modified adjusted gross income above a
threshold of $200,000 ($250,000 for married taxpayers filing jointly) typically pay an additional
3.8% net investment income tax (NIIT) on that income. The NIIT applies whether the investment
income is subject to the income tax rates or the lower capital gains tax rates.6
Tax Advantages on Savings
There are two general forms of tax-advantaged savings accounts in the United States (see
Table 1):
 Pre-tax accounts (also known as “tax-deferred” accounts) exempt contributions
from taxation, typically by letting savers deduct or exclude the value of
contributions from their income when calculating their income tax—while taxing
withdrawals as ordinary income. Taxation on all contributions and earnings is
deferred until the saver withdraws the funds. “Traditional” Individual Retirement
Accounts (IRAs) and defined contribution (DC) employer-sponsored retirement
plans (such as 401(k) accounts) are examples of pre-tax accounts. Note that with
pre-tax accounts, all gains are taxed as ordinary income in the year the saver
withdraws funds, unlike taxable accounts, in which different kinds of gains are
taxed at different times and rates. Inherited pre-tax accounts are subject to tax by
the recipient, although this tax is paid over time depending on the relationship to
the deceased.
 In contrast, after-tax accounts (also known as “tax-exempt” accounts) do not
allow a deduction or exclusion for contributions, but exempt withdrawals from
taxation. Money entering these accounts is taxed as income, but any growth is
not taxed at all. “Roth” retirement accounts, qualified tuition college savings

4 See CRS Report R47113, Capital Gains Taxes: An Overview of the Issues, by Jane G. Gravelle.
5 See CRS In Focus IF11812, Tax Treatment of Capital Gains at Death, by Jane G. Gravelle.
6 See CRS In Focus IF11820, The 3.8% Net Investment Income Tax: Overview, Data, and Policy Options, by Mark P.
Keightley.
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plans (also known as “529 plans”), Coverdell education accounts, and Achieving
a Better Life Experience (ABLE) accounts are all examples of after-tax
accounts.7
There are two noteworthy exceptions to this classification. First, Health Savings Accounts
(HSAs) offer both deductible contributions and tax-free withdrawals for qualified expenses,
giving them the tax advantage of both a front-loaded and back-loaded account. Second, while the
federal government normally subjects cash-like employment benefits to the payroll taxes, these
taxes do not apply to employer contributions to employer-sponsored savings accounts (such as
401(k)s and HSAs).8
Table 1. Tax Benefits of Selected Savings Accounts
Account Type
Contributions
Growth
Taxable Accounts
Taxable
Taxable. Rate and timing
dependent on nature of
the growth (simple
interest, capital gain,
dividend, etc.)
Traditional retirement accounts Individual and employer
All withdrawals
contributions not
(including contributions
taxable
and growth) taxable
Roth retirement accounts
Taxable
Not taxable
529 plans
Taxable
Not taxable
Coverdell accounts
Taxable
Not taxable
ABLE accounts
Taxable
Not taxable
HSAs
Individual and employer
Not taxable
contributions not
taxable
Notes: This table assumes that contributions and withdrawals qualify for the tax benefit that the account offers.
“Growth” includes both returns on saving that the federal government would otherwise tax annually—such as
simple interest—and returns the government would tax when the saver realized the gains, such as capital gains
and qualified dividends. Note that savers can make nondeductible contributions to traditional retirement
accounts. While savers pay taxes on contributions and withdrawals, the savings can grow tax-free in the account
until withdrawal, unlike taxable accounts that tax some returns annually. Emergency savings linked to defined
contribution pension plans wil become after-tax starting in 2024. Contributions to these emergency savings
accounts wil be taxable, but growth wil not.
The government can exempt income from taxation in one of two ways. First, it can exclude the
income from taxation, in which case taxpayers do not need to report the income when they file
their taxes. Second, it can require the taxpayer to report the income, but then let them deduct the
income from their taxable income. These two forms of benefits are economically equivalent.
After-tax accounts benefit savers by excluding gains from taxation. Pre-tax accounts also benefit
the saver, even though the government will eventually tax the contribution when the saver
withdraws funds from the account. As Figure 1 demonstrates, taxpayers who contribute to pre-
tax accounts can make larger initial contributions because they do not need to pay taxes on the
income they contribute. Even if both accounts grow at the same rate, the additional assets in the

7 See Table 3 for more details on these accounts.
8 See CRS Report R47062, Payroll Taxes: An Overview of Taxes Imposed and Past Payroll Tax Relief, by Anthony A.
Cilluffo and Molly F. Sherlock.
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Tax-Advantaged Savings Accounts: Background and Policy Considerations

pre-tax account (represented by the dashed blue line) compound over time. Even after the assets
face taxation upon withdrawal (represented by the solid blue line), the additional gains make it
more valuable than a similar investment in a taxable account (represented by the grey line).
Figure 1. Benefit of a Pre-Tax Account
Deferring taxation lets a larger pool of assets grow, which benefits the saver.

Notes: The example shows a hypothetical $1,000 that grows by 10% in each of 20 periods and faces a 30% tax
rate. Assumes that the federal government taxes growth in the taxable account annually; if taxes on some gains
would be deferred, such as those on long-term capital gains, the distinction between the taxable and deferred
accounts would be smaller. “Deferred, After Tax” refers to the value of the investment if the saver withdrew it
and paid taxes on the withdrawal.
Equivalence of Pre-Tax and After-Tax Accounts to the Taxpayer
While pre-tax and after-tax accounts appear to offer different tax benefits, they provide the same
benefit to the taxpayer, provided several conditions are met. These assumptions include that
taxpayers face the same marginal income tax rate both when they contribute to the account and
when they withdraw from it;9 that the investments are identical; and that the contributors to the
pre-tax account save the tax benefit they receive for contributing to the account, rather than using
it to increase their consumption. Table 2 illustrates the equivalence of the final cash value of
withdrawals from these accounts.
Table 2. Equivalence of Pre- and After-Tax Accounts

Pre-Tax Account
After-Tax Account
Pre-Tax Contribution
$1,000
$1,000
Tax on Contribution (20% rate)
$0
$200
Contribution, After Tax
$1,000
$800

9 See CRS Report R44787, Statutory, Average, and Effective Marginal Tax Rates in the Federal Individual Income
Tax: Background and Analysis, by Molly F. Sherlock.
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Pre-Tax Account
After-Tax Account
Future Balance (assume 50%
$2,000
$1,600
growth)
Tax on Withdrawal (20% rate)
$400
$0
Amount to Spend
$1,600
$1,600
Notes: This estimate assumes that the taxpayers would contribute the same amount of pre-tax income to
either account. However, if taxpayers who save in pre-tax accounts choose to consume some or all of their tax
benefit in the short-term rather than save it, this equivalence wil not hold. Equivalence also wil not hold if the
taxpayers would be subject to a different marginal tax rate.
The equivalence does not hold when taxpayers pay a different marginal tax rate in one period
than they do in another. In such cases, a taxpayer would receive a larger benefit if they choose to
pay the tax when they have a lower marginal tax rate. Since the federal income tax code is
progressive, savers whose incomes vary over time would typically prefer to pay tax when their
taxable income is relatively low.10
Even in cases when tax rates are the same, this equivalence does not apply to government
revenue. In the example presented in Table 2, the government receives $400 in revenue from a
pre-tax account in the future, but only $200 from the after-tax account today. For the government
to wait to receive the larger amount of revenue, it must incur debt (or reduce its surplus, enabling
it to pay off less outstanding debt). The cost of servicing that debt would offset some of the
benefit of the higher tax revenue.
The Saver’s Credit
Some contributions to certain tax-advantaged accounts also qualify for the Saver’s Credit. The
Saver’s Credit is a nonrefundable tax credit that is worth as much as 50% of the first $2,000 an
individual contributes to retirement accounts. Through 2025, contributions to ABLE accounts
also qualify.
The credit is means tested. In 2023, only taxpayers with an adjusted gross income (AGI) of
$21,750 or less ($43,500 for married taxpayers filing jointly) can claim the full credit. Savers
earning more than $36,500 ($73,000 for married filing jointly) do not qualify for the credit at
all.11 The credit’s rate falls immediately when a filer’s AGI exceeds certain thresholds, creating
“benefit cliffs,” meaning the value of the credit can fall by more than the increase in one’s
income.
The fact that the Saver’s Credit is nonrefundable means many low-income taxpayers—who often
have little or no income tax liability—cannot claim its full value despite qualifying otherwise.
Perhaps as a result, take-up of the credit is low. Only 6.1% of taxpayers claimed the credit in
2019, including 15.5% of households earning between $25,000 and $50,000 but just 0.01% of
taxpayers with AGI below $10,000.12

10 For more on equivalence, see CRS Report RL34397, Traditional and Roth Individual Retirement Accounts (IRAs): A
Primer, by Elizabeth A. Myers. The time value of money could matter from the government’s perspective in this
calculation. However, the government will still receive greater present-value revenues under the pre-tax system than
the after-tax one as long as the rate of return on the accounts exceeds government’s borrowing costs.
11 See CRS Report RL30110, Federal Individual Income Tax Terms: An Explanation, by Mark P. Keightley and
Brendan McDermott.
12 For more on the Saver’s Credit, see CRS In Focus IF11159, The Retirement Savings Contribution Credit, by Molly
F. Sherlock.
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Tax-Advantaged Savings Accounts: Background and Policy Considerations

The SECURE 2.0 Act of 2022 (passed as Division T of P.L. 117-328, the Consolidated
Appropriations Act, 2023), signed into law on December 29, 2022, replaced the Saver’s Credit
with a federal “Saver’s Match” starting in 2027. Savers who earn below $20,500 ($41,000 for
married savers filing jointly) will qualify for a 50% federal match on up to $2,000 in retirement
savings. This income threshold will be indexed to inflation thereafter. Those who earn up to
$15,000 more than this threshold ($30,000 for married filing jointly) will qualify for a reduced
match. Unlike the Saver’s Credit, the federal government will deposit the Saver’s Match directly
into the saver’s retirement account. This structure is unrelated to a saver’s tax liability, meaning
the lowest-income savers will qualify for the full benefit, unlike the nonrefundable Saver’s
Credit.
Limitations on Qualified Contributions and Withdrawals
The benefits of tax-advantaged savings accounts can encourage some savers to use these accounts
to save for purposes besides the ones for which policymakers originally intended. To prevent or
discourage this, policymakers often place limits on contributions or withdrawals from tax-
advantaged accounts.
For example, the law may limit contributions to accounts. To prevent savers from circumventing
taxes on excessively large sums of money, many accounts limit the total value of annual
contributions. Additionally, savers whose income exceeds a maximum level may be ineligible to
claim a tax benefit from these accounts, or even contribute to them at all. For example,
individuals whose modified adjusted gross income equals or exceeds $153,000 ($228,000 for
married couples filing jointly) cannot contribute to Roth IRAs in 2023.
Some savers circumvent these limits. For example, account holders are allowed to “roll over”
assets in one account into another, provided they pay appropriate taxes and fees on such
transactions. Roth IRAs have income limits that preclude high-income households from
contributing directly. However, in a procedure informally known as a “backdoor” Roth IRA,
high-income households sidestep those income limits by contributing to a traditional IRA, and
then rolling those assets into a Roth IRA.13
Additionally, taxpayers may need to pay a penalty on withdrawals used for purposes besides the
account’s intended use.14 Savers who use distributions from the account for anything besides
those permitted by law typically have to pay income taxes on the earnings portion of the
withdrawal, and often must pay a penalty tax as well.
Verifying that taxpayers spent tax-advantaged savings on qualified expenses can be difficult.
Some restrictions—such as the requirement that savers reach a certain age before making
qualified withdrawals from retirement accounts—are relatively easy for the IRS to verify. Yet
others can prove challenging. For example, the firms that administer 529 higher education
savings accounts inform the government of how much money savers withdrew from the funds.
However, unless the IRS audits a taxpayer or account manager, the agency cannot generally
verify that savers spent the withdrawn funds as they claimed they did.

13 See CRS In Focus IF11963, Rollovers and Conversions to Roth IRAs and Designated Roth Accounts: Proposed
Changes in Budget Reconciliation, by Elizabeth A. Myers.
14 See CRS In Focus IF11369, Early Withdrawals from Individual Retirement Accounts (IRAs) and 401(k) Plans, by
Elizabeth A. Myers. Congress has relaxed such rules for certain accounts at times to let savers access funds during
emergencies, such as natural disasters or the COVID pandemic.
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Description of Major Tax-Advantaged Accounts
Table 3 details the six major tax-advantaged savings accounts in the United States today, as well
as new emergency savings accounts that taxpayers will be able to open starting in 2024. The table
does not include Flexible Spending Accounts, which are tax-advantaged accounts employers
create that employees can use to buy benefits such as health insurance. Since any unused funds
are typically forfeited to the employer, these accounts are somewhat different from tax-exempt
accounts owned by individuals. Accordingly, this report does not address them.
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Table 3. Description of Tax-Advantaged Accounts
Deficit
Impact,
Name
Eligible Contributions
Eligible Withdrawals
Tax Treatment
Penalties
FY2023
Traditional and
These plans vary in design. The fol owing
Penalty-free after age 59½. Plans
For traditional: Employer
Non-qualified
$223.7
Designated Roth
parameters apply to 401(k)s.
may allow in-service withdrawals
contributions excluded,
withdrawals: taxed
bil ion
Accounts within
In 2023, combined employee contributions
(for employees who meet certain
employee contributions
as income, plus
employer-
to traditional and Roth plans capped at
age and tenure requirements) or
excluded from taxable
10%.
sponsored plans.
$22,500 or the employee’s wages,
withdrawals on account of financial income, withdrawals taxed
Unless corrected,
whichever are lower. Taxpayers age 50 and hardship. Withdrawals are subject
as income.
excess
older may contribute up to $30,000
to penalty unless account owner
For Roth: Employee
contributions are
($22,500 plus $7,500 in catch-up
meets an exception specified in 26
contributions not included
taxed as income in
contributions). The sum of employee and
U.S.C. §72(t).
in taxable income,
the year they are
employer contributions capped at $66,000
For traditional: minimum
withdrawals untaxed.
contributed, and
($73,500 for taxpayers 50 and older).
distributions required to begin at a Employer contributions
again in the year

specified age (varies depending on
exempt from payrol taxes.
they are withdrawn.
date of birth). Current workers
Amounts that
can typically delay these
beneficiaries fail to
distributions for their current
withdraw under the
employer’s plan until retirement.
minimum

distribution
requirements are
subject to a 25%
penalty.
CRS-8

Deficit
Impact,
Name
Eligible Contributions
Eligible Withdrawals
Tax Treatment
Penalties
FY2023
Traditional and
Contributions are capped at $6,500 or the
Withdrawals may be made at any
For traditional:
Excess
$38.9
Roth IRAs
contributor’s compensation, whichever is
time and for any reason. Penalty-
contributions may be
contributions are
bil ion
lower. Taxpayers over age 50 can
free after age 59½, if the saver
deductible depending on
taxed at 6% per
contribute an additional $1,000.
becomes totally and permanently
income and workplace
year for each
Contributions to traditional IRAs may be
disabled, or if the saver withdraws
pension coverage,
year the excess
deductible depending on income and
funds for a reason that qualifies for withdrawals taxed as
amounts remain in
workplace pension coverage. Taxpayers
a penalty exception.
income.
the IRA..
covered by a retirement plan at work with
For traditional: minimum
For Roth: Contributions
Ineligible
modified adjusted gross income (MAGI) of
distributions required to begin at a not deductible, qualified
withdrawal: non-
$73,000 - $83,000 ($116,000-$136,000 for
specified age (varies depending on
distributions untaxed.
contribution
married couples filing jointly) may take a
date of birth).

amount taxed as
partial deduction; no deduction is

income, plus 10%.
permitted for taxpayers with MAGI of
Penalty waived for
$83,000 or more ($136,000 or more for
certain expenses,
married couples filing jointly).
including qualified
Deductibility of traditional IRA
spending on a first
contributions does not phase out for
home, out-of-
taxpayers who are not covered by a
pocket medical
workplace retirement plan, except for
expenses, higher
married filing jointly taxpayers with a
education expenses,
spouse who is covered by a workplace plan
and birth/adoption
with MAGI between $218,000 and
expenses.
$228,000. No deduction is permitted for
MFJ taxpayers with MAGI of $228,000 or
more.
For Roth, the contribution limit falls for
those with MAGI of $138,000-$153,000
($218,000-$228,000 for married couples
filing jointly) before phasing out completely.

CRS-9

Deficit
Impact,
Name
Eligible Contributions
Eligible Withdrawals
Tax Treatment
Penalties
FY2023
HSAs
Individuals must be enrol ed in a high-
Must be spent on qualified out-of-
Employer contributions
Excess contribution: $11.5
deductible health insurance plans (HDHP)
pocket medical expenses to avoid
excluded, individual
6% annually until
bil ion
and not have disqualifying coverage. The
penalties.
contributions deductible
remedied.
HDHP must have a deductible of at least
and withdrawals untaxed.
Ineligible
$1,500 ($3,000 for family coverage) and
Employer contributions are
withdrawal: taxed
annual out-of-pocket expenses for covered
exempt from the payrol
as income, plus
benefits must be below $7,500 ($15,000 for
taxes.
20%.
family coverage). The HDHP may only
cover specified benefits before the owner
The 20% penalty is
meets their deductible.
waived in cases of
disability or death,
Contributions capped at $3,850 ($7,750 for
and for those aged
family coverage).
65 and over.
Individuals age 55 and older may make
$1,000 in catch-up contributions.
ABLE
Contributions from the beneficiary are
Must be spent on qualified
Contributions not
Ineligible
JCT
Accounts
capped at the lower of AGI and the federal
disability-related expenses to avoid deductible, withdrawals
contribution: 6%
estimated
poverty level. Contributions from others
penalties.
untaxed.
annually.
the
are subject to the gift tax. The first $17,000
Ineligible
FY2022-
an individual gives to another is exempt
withdrawal: non-
2026 cost
from consideration towards the gift tax.
contribution
was below
Beneficiaries may only have one ABLE
amount is taxed as
$50 mil ion
account in their name. Beneficiaries must
income, plus 10%.
have attained blindness or disability before
the age of 26. Starting in 2026, that age
limit wil rise to 46.
Qualified tuition
Contributions are subject to the gift tax.
Must be spent on qualified higher
Contributions not
Ineligible
$3.6 bil ion
programs (also
The first $17,000 an individual gives to
education expenses to avoid
deductible, withdrawals
withdrawal: non-
known as 529
another is exempt from consideration
penalties.
untaxed.
contribution
Plans)
towards the gift tax.
Through 2025, beneficiaries can
amount is taxed as
States set their own limits on the maximum spend up to $10,000 on
income, typically
aggregate amounts savers may contribute
primary/secondary school
plus a 10% penalty.
to a given 529 plan account.
expenses and $10,000 repaying
student loans.
CRS-10

Deficit
Impact,
Name
Eligible Contributions
Eligible Withdrawals
Tax Treatment
Penalties
FY2023
Coverdell Plans
Capped at $2,000 per beneficiary.
Beneficiary must spend
Contributions not
Ineligible
$200
(also known as
Also capped at $2,000 per contributor for
withdrawals on qualified primary,
deductible, withdrawals
contribution: 6%
mil ion
“Education
any one beneficiary. The cap is lower for
secondary, or higher education
untaxed.
annually.
IRAs”)
contributors with MAGI of $95,000-
expenses to avoid penalties.
Ineligible
$110,000 ($190,000-$220,000 if married
Student loan payments do not
withdrawal: non-
filing jointly), and those earning above these qualify, but rol overs into 529 plans
contribution
thresholds may not contribute.
do.
amount is taxed as
income, typically
plus a 10% penalty.
Emergency Saving
Employers who sponsor defined contribution
Savers will be able to make up to 4
Contributions not deductible,
Ineligible contribution: N/A
Accounts
retirement savings plans will be allowed to
withdrawals per year without
withdrawals untaxed.
if possible, the
(The federal
create tax-advantaged emergency savings
incurring fees. Savers will not need to
contribution is made
government will
accounts for their employees.
justify their withdrawals or
to the employer-
begin recognizing
The total savings in the account attributable to
demonstrate that they spent their
sponsored retirement
these accounts in
the savers’ contributions will not be allowed to
withdrawals on expenses related to
account instead of
2024.)
exceed the lesser of $2,500 or any other limit
any particular emergency.
the emergency saving
set by the employer. Highly compensated
account. If not, the
employees will not be allowed to contribute to
plan must reject the
these accounts.
contribution.
Employers will be allowed to match employee
Ineligible withdrawal:
contributions and automatically contribute up
Not applicable, since
to 3% of each employees’ compensation to the
savers do not need to
accounts.
justify withdrawals.
Source: CRS analysis of the Internal Revenue Code and IRS publications; CRS Committee Print CP10005 (2022); Joint Committee on Taxation, “Estimates of Federal
Tax Expenditures for Fiscal Years 2022-2026,” JCX-22-22, (Washington, DC: December 22, 2022); CRS Report RL34397, Traditional and Roth Individual Retirement
Accounts (IRAs): A Primer, by Elizabeth A. Myers; CRS Report R47152, Private-Sector Defined Contribution Pension Plans: An Introduction, by John J. Topoleski and Elizabeth A.
Myers; CRS Report R45277, Health Savings Accounts (HSAs), by Ryan J. Rosso; CRS Report R41967, Higher Education Tax Benefits: Brief Overview and Budgetary Effects, by
Margot L. Crandall-Hol ick and Brendan McDermott.
Notes: Limitations are those that apply in 2023 and may not be exhaustive. The revenue estimate for IRAs includes Keogh plans for self-employed workers. Keogh plans
can be defined contribution or defined benefit, although most are defined contribution. JCT’s revenue estimates do not account for changes in tax law since August 16,
2022. These estimates are based on the Congressional Budget Office’s March 2022 revenue baseline and JCT’s own projections of the gross income, deductions, and
expenditures of individuals and corporations.
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Tax-Advantaged Savings Accounts: Background and Policy Considerations

Impact on Saving
Despite the expansion of tax-advantaged accounts in recent decades, economists have yet to reach
a consensus as to whether tax-advantaged accounts encourage households to consume less (and
therefore, save more) of their income than they otherwise would.
There are several reasons that these accounts may or may not encourage greater private or
national saving. First, tax advantages raise the return that a saver can expect from saving a certain
amount of money. The expectation that tax advantages will encourage saving relies on the
assumption that increasing the return to saving will make households more willing to sacrifice
current spending to achieve greater returns in the future. Economists call this incentive the
“substitution effect.”
However, higher returns also mean households can achieve greater future balances without saving
more. Households may then decide that they do not need to save as much to achieve their saving
goals, such as for retirement. Economists call this the “income effect.”
If the income effect overpowers the substitution effect, then tax-advantaged savings accounts
could encourage households to save less rather than more. For example, suppose a household
without access to a tax-advantaged account would have saved enough to have the same
disposable income in retirement as they do while working. If they then had access to a taxable
account, they would receive greater gains, and would have a higher income in retirement than
they do today. To smooth out their disposable income across their lifetime, the family would
respond by saving less and spending more at present.
Even if tax-advantaged savings do encourage more private saving, they may not increase total
saving in the national economy. Tax-
advantaged accounts can increase
How Do Contribution Limits Affect Saving?
the amount of savings an account
Policymakers might try to stop households from saving excessively
holder has in two ways. First, the tax
large amounts of income tax free by capping annual contributions
benefit itself can increase the value
to accounts that are eligible for the tax benefit. However, doing so
of the account holder’s savings.
also eliminates the savings incentive that tax-advantaged accounts
may otherwise offer.
Second, the incentive could make
saving more lucrative, and
For example, suppose a household would save $30,000 per year
without any tax advantage, and the federal government capped
encourage the account holder to save
contributions to a tax-advantaged account at $20,000. The
a larger share of their income to
household would save the $20,000 in a tax-advantaged account and
access the tax benefit. In the first
save their remaining $10,000 in a taxable account.
case, the taxpayer’s level of saving
Since the rate of return on savings above $20,000 would not
rises, but the government’s saving
change, the family would have no incentive to save more than they
falls by the amount of the tax
otherwise planned to. However, since they know they wil receive
a tax advantage on the first $20,000 they saved, they may decide
benefit. Tax benefits reduce federal
they do not need to save all of the remaining $10,000 to reach
revenues, which the government can
their saving goal.
finance by borrowing, raising other
In this case, the savers would have no substitution effect encouraging
taxes, or reducing spending.
them to save more, but would stil have an income effect
Government borrowing naturally
discouraging them from doing so.
increases the federal debt, so it
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represents a reduction in public savings, which would offset some of the increase in private
saving.15
If tax-advantaged accounts do not stimulate more household saving, they would neither increase
productive investment in the economy nor encourage more people to participate in the activity
that savers can use the account for. In such case, the tax windfall that the accounts provide would
still make that intended purpose more affordable for savers with tax-advantaged accounts.
Capping annual or lifetime contributions may make accounts more prone to providing a windfall
benefit instead of encouraging new saving. Tax-advantaged accounts create no incentive for
households who want to raise their saving rate above what the cap permits to do so. However,
they would receive a federal subsidy for all of their tax-advantaged saving below the cap.16 In
2018, approximately 50.7% of taxpayers contributing to traditional IRAs contributed the
maximum, as did 33.9% of taxpayers contributing to Roth IRAs and 8.5% of individuals making
elective deferrals to employer-sponsored DC plans.17
Research on the Impact of Tax Benefits of Tax-Advantaged
Accounts on Savings
Nearly all academic research on whether tax advantages stimulate saving has focused on
retirement accounts. Early research on the topic found little evidence that households newly
eligible for tax-advantaged retirement accounts shifted existing savings into those accounts,
suggesting the accounts did encourage people to save more.
Determining whether tax-advantaged savings accounts encourage account holders to save more
than they otherwise would is difficult for a number of reasons.18 For example, those who prefer to
save more of their income may be more likely to open accounts, meaning that the fact that
account holders save more than non-holders is insufficient to determine whether the accounts are
encouraging the saving. Even looking at the same savers before and after they become eligible for
a tax-advantaged account may still fail to isolate the effect of eligibility if that change coincides
with other important changes in law, personal finances, or other factors. The preponderance of
later research that attempted to account for these and other limitations in the early studies found
that tax advantages had little to no effect on national savings.
Early Work
Carroll and Summers (1987) observed that a sudden rise in the personal savings rate in Canada
relative to that of the United States coincided with Canada’s expansion of tax-advantaged

15 Jane Gravelle, , “Do Individual Retirement Accounts Increase Savings?” Journal of Economic Perspectives, vol. 5,
no. 2 (Spring 1991), pp. 133-148.
16 See Leonard Burman, Joseph Cordes, and Larry Ozanne, “IRAs and National Savings,” National Tax Journal, vol.
43, no. 3 (September 1990), pp. 259-283.
17 See CRS Insight IN11722, Data on Contributions to Individual Retirement Accounts (IRAs), by Elizabeth A. Myers
and John J. Topoleski; and CRS Insight IN11721, Data on Retirement Contributions to Defined Contribution (DC)
Plans, by John J. Topoleski and Elizabeth A. Myers.
18 The following literature reviews explain these and other critiques of the literature in more detail. James M. Poterba,
Steven F. Venti, and David A. Wise, “Personal Retirement Saving Programs and Asset Accumulation: Reconciling the
Evidence” in Frontiers in the Economics of Aging, ed. David A. Wise (Cambridge, MA: The National Bureau of
Economic Research, 1998), pp. 23-124; Eric M. Engen, William G. Gale, and John Karl Scholtz, “The Illusory Effects
of Saving Incentives on Saving,” Journal of Economic Perspectives, vol. 10, no. 4 (Fall 1996), pp. 113-138.
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accounts in the early 1970s. Contributions to Canadian tax-advantaged accounts could explain at
most half of the rise in the Canadian savings rate.19
Feenberg and Skinner (1989) found that from 1980 to 1984, households that opened IRAs
actually saved more in other assets after opening their accounts than before. These results suggest
that the savers were not financing their IRAs with existing saving, but rather with new savings.20
The study did not control for whether savers who open IRAs do so because they prefer to save
more regardless of any tax advantage, which is a common limitation in the literature.
Competing Research and Methodology
From the mid-1980s through the early 2000s, two groups of authors studied the expansion of
IRAs and 401(k)s in the 1980s, but reached different conclusions about their impact on savings.
Poterba, Venti, and Wise conducted a series of studies that found that tax-advantaged retirement
accounts did increase saving.21 In contrast, Engen, Gale, and Scholtz typically found that they did
not.22
Debates in the literature included how best to account for differences in individuals’ preferred
level of saving, how and whether they controlled for income and wealth levels, the relevance of
external events, and the quality of the datasets themselves. Additionally, while early papers only
asked whether account holders saved less in other financial assets such as stocks and bonds, later
papers also considered whether people would fund retirement accounts by contributing less to
pensions or investing less in their home’s equity.23
Poterba, Venti, and Wise (1998) found that the financial assets of IRA contributors grew much
more quickly after becoming eligible for IRAs than before. The authors interpreted this finding as
evidence that IRAs encouraged these households to save more than they otherwise would.
Meanwhile, Engen and Gale (2000) found that contributing to 401(k)s did not coincide with
significant increases in total wealth for any income group besides the lowest earners, who held
the smallest share of 401(k) savings. They also found some evidence that those who contributed
to 401(k)s invested less in their homes. This finding suggests savers were substituting 401(k)
savings for home equity.
Later Findings
Subsequent research tended to show that tax-advantaged retirement accounts do not encourage
people to save more. For example, Pence (2001) found that households newly eligible for 401(k)
plans did not increase their average overall savings by more than other households at any income
level, perhaps in part because they invested less in their home.24 Attanasio and DeLeire (2002)

19 Chris Carroll and Lawrence H. Summers, “Why Have Private Savings Rates in the United States and Canada
Diverged?” Journal of Monetary Economics, vol. 20, issue 2 (September 1987), pp. 249-279.
20 Daniel Feenberg and Jonathan Skinner, “Sources of IRA Saving,” Tax Policy and the Economy, vol. 3 (1989), pp.
25-46.
21 For a discussion of these works, see Poterba, Venti, and Wise (1998).
22 For a discussion of the works of Engen, Gale, and Scholtz, see Eric M. Engen and William G. Gale. “The Effects of
401(k) Plans on Household Wealth: Differences Across Earnings Groups,” NBER Working Paper 8032, National
Bureau of Economic Research, December 2000.
23 Households may fund retirement accounts with savings they would otherwise invest in their home by either taking
our larger mortgages, delaying paying down their mortgage, or buying less expensive property.
24 Karen Pence , “401(k)s and Household Saving: New Evidence from the Survey of Consumer Finances,” Federal
Reserve Board of Governors, December 2001.
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showed that individuals who opened IRAs did not cut their spending by any more than existing
IRA contributors on average.25 Benjamin (2003) found that only a quarter of 401(k) contributions
represented new saving.26
An exception is Gelber (2011), who found little difference in the growth of non-401(k) savings
between workers who have always been eligible for 401(k) plans and those who had just become
eligible after working for a period of time. These findings suggest that 401(k) plans encouraged
new saving. 401(k) eligibility may have even made younger and highly educated households
more familiar with saving vehicles, and therefore encouraged additional IRA savings. However,
the author notes that variability in the data limit the strength of these results.27 Few researchers
have studied this topic in the United States in recent years.
Effect of Other Features of Tax-Advantaged Accounts on Savings
Findings from Behavioral Economics
While the research is mixed on whether the tax benefits from tax-advantaged accounts encourage
saving, studies in the field of behavioral economics—which uses psychological findings to study
how cognitive biases cause people to deviate from the consistent, rational decisions assumed in
conventional economic theory—show that other features of these accounts may induce additional
saving.
One study on the power of suggestion, Madrian and Shea (2001), found that workers at a major
company hired after it automatically enrolled staff in a 401(k) were 50% more likely to
participate than those hired before. Workers also responded strongly to the account’s default
settings. Almost two-thirds of new workers participated in the plan, contributed the default
amount, and used the default asset allocation, compared to 1% of pre-existing workers. Those
pre-existing workers actually became more likely to use the default asset allocation even though it
did not apply to them, possibly because they thought their employer endorsed that allocation.28
The fact that workers responded strongly to these changes when they always could have opted in
or contributed in this way suggests that inertia may have motivated their decisions to save.
Later research by Chetty et al. (2014) extended this finding to show that savers respond more to
behavioral effects than tax advantages, specifically.29 This paper examined how people saved
after a series of changes to Danish retirement policy. After the Danish government weakened the
tax-advantage for retirement accounts, savers contributed less, but they offset 99% of that
decrease by saving more elsewhere. However, workers who switched to jobs that automatically
contributed an additional percentage point to retirement accounts actually increased their savings
by 0.8 percentage points. This finding held even for workers who suffered a mass layoff, meaning
a preference for saving was unlikely to drive their decision to move to a firm with a better match.
The authors interpreted these findings as suggesting that most account holders are “passive”

25 Orazio P. Attanasio and Thomas DeLeire, “The Effect of Individual Retirement Accounts on Household
Consumption and National Saving,” The Economic Journal, vol. 112, no. 481 (July 2002), pp. 504-538.
26 Daniel J. Benjamin, “Does 401(k) Eligibility Increase Saving? Evidence from Propensity Score Subclassification,”
Journal of Public Economics, vol. 87 (2003), pp. 1259-1290.
27 Alexander M. Gelber, “How do 401(k)s Affect Saving? Evidence from Changes in 401(k) Eligibility,” American
Economic Journal: Economic Policy, vol. 3, no. 4 (November 2011), pp. 103-122.
28 Brigitte C. Madrigan and Dennis F. Shea, “The Power of Suggestion: Inertia in 401(k) Participation and Savings
Behavior,” The Quarterly Journal of Economics, vol. 116, no. 4 (November 2001), pp. 1149-1187.
29 Raj Chetty et al., “Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts,” The Quarterly
Journal of Economics, vol. 129, no. 3 (August 2014), pp. 1141-1220.
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savers who respond more to the expectations set by the default saving rate than they do to the
return on investment.
One could attribute these strong behavioral responses to some of the requirements employers
must meet to offer tax-advantaged retirement accounts. Employers may choose to offer tax-
advantaged accounts to recruit and retain employees. Once they do, they then provide matches to
encourage enough employees to participate that the plan meets requirements meant to prevent
discrimination in favor of highly compensated employees. Without the tax advantage that these
accounts offer, it is possible that fewer employers would offer them, precluding any behavioral
responses from encouraging saving.
Short vs. Long-Term Saving
Another non-tax factor that could determine whether tax-advantaged savings accounts encourage
new saving is the time over which households can save in them. Savings held only briefly may
not have much time to grow. Further, short-term swings in the prices of assets may make the
value of a tax-advantaged account that taxpayers expect to need soon more volatile.
As a result, the value of a tax advantage may depend, in part, on how long savers typically hold
the accounts. This, in turn, will depend on the purpose of the saving the government created the
advantage to incentivize. While workers often save for retirement or their child’s higher
education over the course of decades, tax-advantaged accounts would likely prove less valuable
to those saving for shorter times. Savers may not find the risk of investing worth the potential
rewards for costs they anticipate will occur in the short- to medium-term. This may be among the
reasons that savers only invested 9% of their holdings in HSAs—which they can use for short-
term out-of-pocket medical costs—in assets other than cash in 2020.30
Government Revenue
Subsidizing saving through tax-advantaged accounts reduces federal tax revenue. In 2022, the
Joint Committee on Taxation (JCT) estimated that tax-advantaged savings accounts cost the
federal government approximately $280 billion in revenues in FY2023 (see Table 3, above).31
Ninety-five percent of that cost was attributable to retirement accounts.32 If not paired with
spending reductions or alternative tax increases, these lost revenues increase the federal deficit.
Pre-tax benefits reduce income tax receipts immediately, although the government will eventually
tax distributions (possibly at different rates) from those accounts. The revenue loss from after-tax
savings accounts, meanwhile, occurs whenever the government would have taxed the gains on the

30 Paul Fronstein, Trends in Health Savings Account Balances, Contributions, Distributions, and Investments and the
Impact of COVID-19, Employee Benefit Research Institute, Issue Brief No. 538, September 15, 2021.
31 Joint Committee on Taxation, “Estimates of Federal Tax Expenditures for Fiscal Years 2022-2026,” JCX-22-22,
(Washington, DC: December 22, 2022). JCT’s estimates use a cash-flow accounting method, meaning they account for
revenues raised in a given year, but not costs or revenues the government will incur in the future. JCT estimates the
cost of tax expenditures by modeling the effect of eliminating each expenditure individually if taxpayers could then
respond by claiming other expenditures. Since taxpayers who lose access to one form of tax-advantaged account may
choose another, JCT’s estimate likely understates the fiscal cost of tax-advantaged accounts. Note also that the
expiration of many income tax provisions of P.L. 115-97 at the end of calendar year 2025 will likely raise the cost of
these expenditures in subsequent years.
32 Generally, these figures includes defined contribution plans and Keogh plans for self-employed workers. Keogh
plans can be defined benefit or defined contribution plans. However, most are defined contribution.
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savings, which could be many years later in the case of long-term capital gains. As a result, the
revenue loss associated with these accounts occurs later than for pre-tax accounts.
Fiscally, this timing difference can affect the cost of financing these accounts. Pre-tax accounts
require the government to cover the revenue shortfall sooner than after-tax accounts. It can do so
by either cutting spending, raising other taxes, borrowing, or a mix of the three. Borrowing
requires the government to pay interest on that debt in the future. Since pre-tax accounts cost the
government more revenue in the short-term, they can also require it to incur more short-term
interest costs than after-tax accounts do. Additionally, more of the revenue losses associated with
after-tax accounts may occur outside the 10-year budget window JCT uses to score the cost of tax
law changes.33 This later loss of revenue might make after-tax accounts more politically palatable
than deferred accounts.
Feldstein (1995) argued that holdings in tax-advantaged savings accounts could stimulate
investment—and therefore economic growth—that raises corporate tax revenue. As savings
increased, businesses could sell more stocks and bonds, and use the proceeds to invest in
expanding production. The profits businesses made on new production would be taxed. Assuming
that half of IRA contributions represent new economic investment, he estimated that this revenue
could more than compensate for lost income-tax revenue in the long run.34 However, critics, such
as Engen, Gale, and Scholtz (1996) and Ruggeri and Fougère (1997) countered that Feldstein
relied on unreasonable assumptions.35
Tax-advantaged accounts can lower state and local governments’ revenue as well. Forty-one
states have state income taxes, and many have laws or policies that automatically conform
definitions or structures in their tax code to the federal code.36 As a result, many states
automatically provide the same tax benefits to tax-advantaged accounts as the federal
government. Federal expansions of tax-advantaged savings accounts would reduce those state and
local governments’ revenues, absent a change in state law.
Distribution of Tax Benefit by Income
High-income taxpayers hold the vast majority of balances in most tax-advantaged savings
accounts. The Tax Policy Center estimated that the highest earning fifth of households received
47% of the present value of the current and future tax benefit of tax-advantaged retirement
accounts in 2020.37 That share would rise to 56% of the benefit if Congress were to permanently
extend the temporary tax rate reductions passed as part of P.L. 115-97, the law popularly known

33 While the Congressional Budget Office estimates the future cost of spending programs, JCT typically estimates the
changes to revenue associated with tax policy changes. See Joint Committee on Taxation, “Revenue Estimating,”
https://www.jct.gov/operations/revenue-estimating/. Accessed November 8, 2022
34 Martin Feldstein, “The Effects of Tax-Based Saving Incentives on Government Revenue and National Saving,”
Quarterly Journal of Economics, vol. 110, no. 2 (May 1995), pp. 475–494.
35 Engen, Gale, and Scholtz (1996); Guiseppe Ruggeri and Maxime Fougère, “The Effect of Tax-Based Savings
Incentives on Government Revenue,” Fiscal Studies, vol. 18, no. 2 (1997), pp. 143-159.
36 Even if states do not conform their definitions to the federal tax code’s automatically, they may choose to do so
whenever federal lawmakers create, alter, or eliminate a tax-advantaged account to simplify taxpayers’ experience.
37 Tax Policy Center, “Table T20-1039: Eliminate Deductions for New Contributions to Retirement Savings Plans,”
May 7, 2020, https://www.taxpolicycenter.org/model-estimates/tax-incentives-retirement-savings-may-2020/t20-0139-
eliminate-deductions-new.
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Tax-Advantaged Savings Accounts: Background and Policy Considerations

as the Tax Cuts and Jobs Act (TCJA). Under the TCJA, the reduced marginal tax rates are
scheduled to expire after 2025.38
Education accounts are similarly concentrated among high-income families. While just 0.3% of
the lowest-earning half of households had 529 plans in 2013, 16% of households in the highest-
earning 5% did, and they typically held over 3.6 times as much in those accounts.39
Higher-income households typically save a larger share (and hence dollar amount) of their
income than lower-income households do, enabling them to take advantage of these accounts.40
Additionally, higher-income people generally have greater access and participation rates for tax-
advantaged savings accounts compared to lower-income people. For example, a larger share of
full-time and high-earning employees work for employers who sponsor 401(k) accounts than
part-time and lower-earning employees do.41
The tax code also naturally makes tax-advantaged saving more attractive for high-income
households than others. The benefit of a tax deduction or exemption depends in part on the
marginal tax rate that a saver would otherwise pay on their gains or contributions (Figure 2).
Since the income tax code is progressive, marginal rates rise with income. As a result, high-
income people often benefit more from excluding some savings or gains from taxable income
than lower-income people do.
Figure 2. Tax Deductions and Exemptions are Often Regressive

Notes: Based on 2023 marginal income tax rates for a single filer. Since the Social Security payrol tax only
applies to income up to a taxable maximum threshold ($160,200 in 2023), it is regressive. Tax exemptions that
lower income subject to the Social Security payrol tax therefore have some offsetting progressivity.

38 Tax Policy Center, “Table T20-1038: Eliminate Deductions for New Contributions to Retirement Savings Plans.
Baseline: Current Law with TCJA Permanently Extended,” May 7, 2020, https://www.taxpolicycenter.org/model-
estimates/tax-incentives-retirement-savings-may-2020/t20-0138-eliminate-deductions-new.
39 Simona Hannon et al., “Saving for College and Section 529 Plans,” Fed Notes, Washington: Board of Governors of
the Federal Reserve System, February 3, 2016.
40 Bhutta et al., “Changes in U.S. Family Finances from 2016 to 2019,” p. 13.
41 See Bureau of Labor Statistics, March 2022 National Compensation Survey (NCS), September 2022,
https://www.bls.gov/ncs/ebs/benefits/2022/home.htm.
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For example, suppose two people both claim a tax deduction of $1,000. One person is subject to a
marginal income tax rate of 24 percent, while the other pays a lower marginal income tax rate of
12 percent. Both people could reduce the amount of income subject to the income tax by $1,000.
However, that reduction would save the person who is subject to the 24 percent marginal rate
$240, while it would save the other person $120.42 Low earners might value an additional dollar
of benefit more than higher earners do, as they are more likely to need the benefit to pay for
expenses that are more essential.
People often hold savings in tax-advantaged accounts over multiple tax years, which complicates
this analysis in two ways. First, taxpayers may not face the same marginal tax rate when they
contribute to an account and when they realize gains on it. Those who contribute to pre-tax
accounts can receive a larger benefit if they pay higher marginal tax rates when they contribute to
their account and claim their deduction than when they withdraw their savings and have to pay
tax. Savers with after-tax accounts benefit most from the opposite: paying a lower marginal tax
rate when they contribute and paying taxes at a higher rate when they withdraw.
Second, most tax-advantaged accounts exempt from taxation either qualified contributions or
withdrawals, but still tax the other (as discussed above, HSAs do not tax either). Even when
savers pay the same marginal tax rate both when they contribute and when they withdraw, the
taxation that the savings face will partially counteract the regressivity of the tax advantage.
For example, savers with high lifelong marginal tax rates who contribute to pre-tax accounts
receive a larger initial deduction or exemption than savers with low marginal tax rate, but pay a
higher tax rate on their withdrawals.43 Compared to similar investments in a taxable account,
savers with high lifelong marginal tax rates can effectively make larger initial contributions than
savers with low rates.44 Similarly, while savers facing high marginal tax rates pay more tax on
their initial contributions to after-tax accounts than other savers do, they also receive a larger tax
benefit when they withdraw their savings. So long as the investment experiences growth, savers
with high lifelong marginal tax rates should always receive a larger benefit (in percentage terms)
from a tax advantage than those with low lifelong marginal rates.
Some have argued that measuring the distributional impact of these accounts in isolation—rather
than in conjunction with other benefits—is misleading. They argue this is because an entire
system of government benefits can be progressive even if one component, such as a tax-
advantaged account, is regressive.45
Accounts aimed at narrower portions of the population may prove less regressive than others. For
example, individuals who meet the disability criteria for an ABLE account have difficulty
performing certain actions or activities, such as working. The exemption of ABLE account assets
from means tests for other social benefits may compel some to open them for reasons besides the
tax benefit. If so, these alternative incentives may overpower the forces that typically make tax-
advantaged accounts regressive.

42 See Congressional Budget Office, The Distribution of Major Tax Expenditures in 2019, October 2021.
43 In addition to assuming taxpayers face the same marginal tax rate throughout their lives, these examples assume that
savers in tax-deferred accounts save their entire tax benefit. If they choose to consume some of their tax deferral upon
contribution, their initial contribution would be smaller than presented here. Since less initial savings would grow, the
equivalence between tax-deferred and tax-exempt accounts would not hold, and the advantage that high marginal tax
rate savers have over low marginal tax rate savers would be smaller.
44 Peter Brady, “How America Supports Retirement: What Do Tax Rates Have to Do with the Benefits of Tax
Deferral? Less Than You Think,” Investment Company Institute, February 24, 2016.
45 For example, see Peter Brady, How America Supports Retirement: Challenging the Conventional Wisdom on Who
Benefits (Investment Company Institute, 2016).
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Recent Proposals for Reform
In recent years, lawmakers have put forth several proposals to either expand the coverage of tax-
advantaged accounts or make the tax benefit they provide more progressive. These reforms
include changing their tax treatment, either by converting them to direct spending programs or tax
credits; augmenting them with additional tax credits; changing their limitations; or letting
employers contribute to more accounts tax-free. Some have also proposed creating new tax-
advantaged savings accounts in the hopes of encouraging saving for additional purposes.
Change the Tax Benefit
Some have proposed replacing certain tax-advantaged accounts with direct spending or tax
credits. While the value of a deduction depends on the marginal tax rate a taxpayer would
otherwise pay on the deducted income, direct spending and refundable tax credits give all
qualified claimants the same financial benefit.46 For example, President Obama proposed phasing
out the federal tax advantage for 529 plans and Coverdell plans, and using the resulting revenue
to increase spending on a tax credit for higher education expenses.47 Additionally, lawmakers
have suggested creating new direct spending programs that match contributions to 529 plans,
similar to the benefit that the Saver’s Match will provide some savers contributing to retirement
accounts starting in 2027.48
Alter or Expand Employer Contributions
Another commonly proposed reform is to alter the treatment or nature of employer contributions.
Employers can typically deduct employee compensation, including contributions to tax-
advantaged retirement accounts and HSAs, from their own taxable income, even when the federal
government does not consider that compensation part of the employee’s taxable income.
Lawmakers could let employers contribute to tax-advantaged accounts besides employer-
sponsored retirement accounts and HSAs. Some have proposed letting employers contribute to
529 or ABLE accounts directly.49 Others have suggested letting employers contribute to ABLE
accounts in lieu of retirement accounts, which would allow disabled people to save more without
losing access to means-tested benefits.50
Change Limitations
Some have suggested loosening limits on contributing to and withdrawing from tax-advantaged
accounts. These proposals include changing the legal thresholds or reducing the penalties
associated with unqualified contributions or withdrawals.51 However, others involve changing the
structure of the limitations, and their nature depends on the account in question.

46 “Nonrefundable” credits lower a taxpayer’s income tax burden to zero, but no further, so their exact value depends
on a household’s tax burden.
47 Office of the Press Secretary, “FACT SHEET: A Simpler, Fairer Tax Code That Responsibly Invests in Middle Class
Families,” The White House, January 17, 2015, https://obamawhitehouse.archives.gov/the-press-office/2015/01/17/fact-
sheet-simpler-fairer-tax-code-responsibly-invests-middle-class-fami.
48 For example, S. 1173, the Earn to Learn Act (117th Congress).
49 For example, H.R. 529, the 529 and ABLE Account Improvement Act of 2017 (115th Congress).
50 For example, H.R. 4672, the ABLE Employment Flexibility Act (117th Congress).
51 For example, H.R. 725, the Personalized Care Act of 2021, and H.R. 9160, the Healthcare Freedom Act of 2022
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Retirement Accounts
The Build Back Better Act, an earlier version of P.L. 117-169, would have prohibited high-
income households from contributing to IRAs if such contribution would cause the account’s
value to exceed $10 million.52 Doing so would have generated more tax revenue from high-
income taxpayers. The bill also would have increased required minimum distributions from large
retirement accounts for high-income savers.53 These provisions were removed from the bill before
final passage.
Health Savings Accounts
Lawmakers have proposed expanding eligibility for HSAs by making all taxpayers eligible to
open them, not just those who also own high-deductible health insurance plans. Others have
suggested parents should be able to open HSAs for their children to use once they reach the age
of 18 and are no longer a dependent.54
There have also been proposals to let savers spend their HSA funds without penalty on a wider
scope of medical expenses, such as spending on home care expenses or adult diapers.55
Additionally, some have proposed prohibiting HSAs from covering costs related to certain types
of abortions.56
Create New Tax-Advantaged Accounts
Just as existing tax-advantaged accounts are meant to encourage saving for specific purposes,
some have proposed creating new accounts to encourage saving for other costs. For example,
some have proposed creating new after-tax accounts that households could use to save for
childcare expenses, parental leave expenses, or down payments on a first home.57
Other proposals involve creating tax-advantaged accounts for children, which the beneficiaries
could use for specific purposes once they reached adulthood. Typically, these purposes include
wealth-building activities such as obtaining a higher education or making long-term investments.
They may also include starting a business or buying a home. In some proposals, parents would

(117th Congress).
52 The text of the Build Back Better Act that included the changes described in this paragraph is available at
https://docs.house.gov/meetings/BU/BU00/20210925/114090/BILLS-117pih-BuildBackBetterAct.pdf.
53 See CRS Report R46923, Tax Provisions in the “Build Back Better Act:” The House Ways and Means Committee’s
Legislative Recommendations, coordinated by Molly F. Sherlock.
54 For example, H.R. 6507, the Child Health Savings Account Act of 2022 (117th Congress).
55 For home care, see H.R. 2898, the Homecare for Seniors Act. For diapers, see H.R. 7585, the Health Equity and
Accountability Act of 2022, and H.R. 259, the End Diaper Need Act of 2021.
56 For limiting abortion expenses, see H.R. 6471, the Protecting Life in Health Savings Accounts Act. For expanding
contraception expenses, see H.R. 8428, the Allowing Greater Access to Safe and Effective Contraception Act.
57 For childcare, see Donald J. Trump for President Campaign, “Fact Sheet: Donald Trump’s New Child Care Plan.”
September 13, 2016, https://web.archive.org/web/20170308122458/https://www.donaldjtrump.com/press-releases/fact-
sheet-donald-j.-trumps-new-child-care-plan. For parental leave, see S. 247, the Working Families Flexibility Act of
2021. For down payments on a home, see H.R. 1360, the American Dream Down Payment Act of 2021. All of these
bills were introduced in the 117th Congress. Some states already offer tax-advantaged accounts for first-time
homebuyers. The benefits only apply to state income taxes. See Sarah O’Brien, “More states are creating tax-
advantaged savings accounts just for first-time home buyers,” CNBC, May 22, 2018.
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contribute funds to the accounts, while in others, the government itself would contribute to the
account.58
Letting taxpayers use savings in existing accounts for additional purposes without penalty could
be equivalent to creating new accounts. For example, lawmakers have proposed letting savers use
funds in 529 plans and Coverdell plans to pay for industry-recognized job-training credentials or
a wider range of expenses related to elementary and secondary education.59
Conclusion
Tax-advantaged savings accounts are a prominent mechanism for social benefits in the United
States. They are among the largest forms of household wealth and may influence how households
prepare for retirement, health care costs, education expenses, and disability expenses.
Supporters argue these accounts induce households to save more for important expenses,
stimulate economic investment, and subsidize the cost of retirement, higher education, health
care, and other major expenses. Yet the evidence that these accounts actually encourage new
saving, as opposed to rewarding households for doing what they would have done anyway, is
mixed. Studies generally find that other features associated with the accounts encourage saving
more strongly.
The substantial tax benefits that these accounts offer accrue disproportionately to higher-income
households. Savers with high taxable income both own a larger share of the assets held in these
accounts and benefit more from the reduction in taxable income these accounts offer. However,
some counter that measuring these accounts separate from other progressive benefit systems is
misleading. These findings may be of interest to policymakers interested in whether tax-
advantaged savings accounts are achieving their goals or whether to use this policy design to
structure a new social benefit.

Author Information

Brendan McDermott
Analyst in Public Finance

58 See S. 2206, the Young American Savers Act of 2021, and S. 222, the American Opportunity Accounts Act (117th
Congress).
59 Proposals in the 117th Congress to make job training eligible include H.R. 2691, H.R. 2171, S. 905, H.R. 8128, and
H.R. 1242. S. 4023, the Lifelong Learning and Training Account Act of 2021, would create new accounts for the same
purpose.
Proposals in the 117th Congress to expand eligible withdrawals for elementary and secondary education include H.R.
605, H.R. 7269, S. 4265, S. 1757, and S. 8913. Additionally, H.R. 625 would make certain costs regarding
homeschooling for military children eligible expenses for 529 plans, and H.R. 499 would create a new tax-advantaged
account specifically for military education expenses.
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Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should not be relied upon for purposes other
than public understanding of information that has been provided by CRS to Members of Congress in
connection with CRS’s institutional role. CRS Reports, as a work of the United States Government, are not
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