US ISA equivalent for tax exempt investment & savings

Question

In the UK you can put up to £11,520 per year into an Individual Savings Account (ISA). This account allows you to invest in stock, unit trusts, index funds etc. and all income and capital gains are free of tax.

Crucially, there is no requirement for this investment to be used for retirement and there is no penalty for withdrawal.

I view this as quite an efficient short/medium term saving mechanism. It also puts your money away in a place that makes it slightly harder to get at (have to sell your investments to get the money out etc) so you aren't tempted to use it in the short term.

Is there any equivalent in the US? IRA is basically the same thing, but of course this has penalties for withdrawal before retirement.

Answer 1

As far as I know, there is no direct equivalent.

An IRA is subject to many rules. Not only are there early withdrawal penalties, but the ability to deduct contributions to an IRA phases out with one's income level. Qualified withdrawals from an IRA won't have penalties, but they will be taxed as income. Contributions to a Roth IRA can be made post-tax and the resulting gains will be tax free, but they cannot be withdrawn early.

Another tax-deductable investment is a 529 plan. These can be withdrawn from at any time, but there is a penalty if the money is not used for educational purposes.

A 401K or similar employer-sponsored fund is made with pre-tax dollars unless it is designated as a Roth 401K. These plans also require money to be withdrawn specifically for retirement, with a 10% penalty for early withdrawal. Qualifying withdrawals from a regular retirement plan are taxed as income, those from a Roth plan are not (as with an IRA).

Money can be made harder to get at by investing in all of the types of funds you can invest in using an IRA through the same brokers under a different type of account, but the contribution will be made with post-tax, non-deductable dollars and the gains will be taxed.