Other Tax Incentives for Personal Saving

Since the inception of the income tax in 1913, certain forms of personal saving have benefited from favorable tax treatment. Policymakers have added other advantages, both permanent and temporary, in later years. Although most of those advantages were not originally intended to promote retirement saving, some have proved popular for that purpose. They include:

• Exempting the interest on state and local bonds;
  
  
• Deferring federal tax on the interest on U.S. savings bonds and exempting it from state and local taxes;
  
  
• Exempting the earnings on life insurance policies;
  
  
• Deferring or forgiving tax on unrealized capital gains;
  
  
• Establishing percentage exclusions and alternative tax rates for realized capital gains; and
  
  
• Partially excluding capital gains on the sale of a principal residence.

Examples of tax incentives specifically designed to encourage retirement saving include the exemption of earnings within annuities and the deduction associated with individual retirement accounts (IRAs).

Recently, tax incentives for personal saving have been established explicitly for purposes other than retirement. Those include Coverdell Education Savings Accounts, Qualified Tuition Plans (529 plans), and Health Savings Accounts.