Only the real interest rate paid on home mortgages or home equity loans should be deductible. But the program has many defects. The major difficulty with promoting savings through the IRA program is that contributors may not withdraw their funds until age fiftynine and a half without substantial penalty. Yet retirement is only one motivation for saving. People also save for down payments on a home and for college tuition.
Most families only focus on saving for retirement after their children are out of college.
Because of this, government data confirm that the existing IIIA primarily attracts taxpayers in their fifties and sixties. The government should turn the IRA program into an Individual Savings Account program to encourage people to save for a home, for education, for retirement, or for medical expenses or temporary disability. In practice, it would probably be impossible to monitor the use of ISA funds after withdrawal. But the government should do what it could to ensure that the funds were used to save for worthwhile longerterm goals. For example, it could require that funds be kept in the ISA account for at least three to five years before they could be withdrawn without penalty.