Is there a US equivalent of ISA

theGrinch

Is there an equivalent or similar for USA residents to invest in shares?

bowlhead99

theGrinch wrote: »

Is there an equivalent or similar for USA residents to invest in shares?

The closest is a Roth IRA (a regular IRA functions more like our pension in that the contributions are tax deductible, while a Roth is just paid into from after-tax income like our ISAs).

However they don't work quite like our ISAs. You can take your contributions out penalty free and tax free (as you've already been taxed before you made the contributions), but because the purpose is supposed to be retirement, there are limitations on withdrawing the 'earnings' you make inside them. You can only avoid taxes on the earnings by meeting the qualifying conditions - being over 59.5 yrs old, and having had the account for more than 5 years, or using the money (up to $10k) for a first time property purchase, or using the money for certain types of education spending (or medical spending / health insurance when unemployed) etc.

Also if you're under 59.5 you may have a penalty on the withdrawal of your earnings, as well as the tax, if you haven't had the account open 5 years.

But it's the closest thing to our S&S ISA, in that you have an annual limit on what you can stuff into them and you can take your contributions out without an age restriction; you just need to wait longer to access your profits tax free (unless you meet the qualifying conditions, die or get disabled etc).

If you have a Roth IRA account you can transfer them to other providers ('rollover') similar to our ISA transfers.

bostonerimus

There are even more restrictions to ROTHs than bowlhead mentions. There is a limit to the annual contribution of $6k and that lowers the more income you declare on your taxes; if that's more than $137k then you cannot make ROTH contributions at all.

They are useful in tax planning for retirement as you can move money from their tax deferred close cousin the IRA (Individual Retirement Account) into them in years of low income. Here's how it works.

The IRA is a personal tax deferred DC pension account and many people transfer their workplace DC pensions into an IRA when they move jobs to keep control and get better investing options. This means that tax deferred IRA balances can get quite large. You can rollover as much IRA money to a ROTH as you like, but you must pay the tax on the IRA money before it goes into the ROTH where growth and withdrawals will then be completely tax free. So if you have a few years of low taxable income it's a good plan to take advantage of your low tax bracket and fill it up with ROTH to IRA rollovers. When I first retired my only income was from a rental property and I declared around $10k taxable income for a few years and I did about $25k IRA to ROTH rollovers up to the top of the 15% tax bracket.

FYI, random bit of information, the ROTH is named after Senator Roth of Delaware and I once met his daughter at a party...