A Big Idea for Kids: The Roth Account for Youth Savings (RAYS) ActPoverty & Family Economics Tax Policy
Research has shown that a family’s savings and assets have a higher correlation to the next generation’s upward mobility than family income. Even a small amount of savings can encourage positive savings behaviors, build self-esteem, and help build a strong financial basis for future personal growth opportunities.
According to the Economic Mobility Project at Pew Charitable Trust, 71 percent of children from high-savings, low-income families rise out of the lowest income quartile over their lives, compared with just 50 percent of children from low-income, low-saving families.
Yet the majority of low-income families do not have any savings, including any savings for retirement – in fact, 45 percent of working Americans do not have any retirement savings. Current U.S. policy promotes asset building within middle- and high-income families, but often these policies neglect to include low-income families in asset education and outreach efforts.
The good news is that there are strong bipartisan efforts occurring in Congress to help families build savings. Last week, Congressman Steve Stivers (R-OH) and Congressman Rubén Hinojosa (D-TX), as co-chairs of the Financial and Economic Literacy Caucus (FELC), reintroduced the Roth Account for Youth Savings (RAYS) Act (HR 1377).
The RAYs Act would remove the earned-income requirement in Roth IRAS for young people, thereby allowing parents, other family members, or organizations to make contributions to an account in their child’s name, even if their child is too young to have any earned income.
Roth IRAS are limited to low- and moderate-income workers and are particularly useful because funds can be withdrawn without a penalty for financial emergencies or investments such as the purchase of a home or higher education.
Even a small investment for a child in a Roth IRA can make a big difference. An initial investment of $500 at birth and $250 investment ($21 a month) each year after could result in $131,829 by age 65.
The RAYS Act is common sense. It requires no new federal spending, and would provide significant assistance in helping children in low- and moderate-income families to build financial savings
This is just a step to securing financial stability for America’s families, but it’s a significant one. We applaud Congressman Stivers and Congressman Hinojosa for their leadership and look forward to working with them to pass the RAYs Act.
For more information on the RAYS Act and other ideas on how to make America a better place to be a child and raise a family please see First Focus’s new publication, Big Ideas 2015 – Pioneering Change: Innovative Ideas for Children and Families.
Want to learn more? First Focus is a bipartisan advocacy organization dedicated to making children and families the priority in federal policy and budget decisions. Learn more about our work on poverty/family economics and tax policy.