US version of ISA – Simple guide to tax‑free savings in America

If you’ve heard about an ISA in the UK and wonder what the American equivalent looks like, you’re not alone. The US doesn’t call it an ISA, but it offers similar tax‑advantaged accounts that let your money grow without paying taxes on the earnings. This guide breaks down the basics, shows you how to get started, and points out the biggest mistakes to dodge.

In the UK, an ISA protects your savings and investments from income tax and capital gains tax. Across the pond, the closest match is the Roth IRA, plus other options like a Traditional IRA or a 401(k) if you have an employer plan. The key idea is the same: you put money in now, let it compound, and keep more of the profit for yourself.

How the US ISA works

The Roth IRA is the go‑to account for most people looking for an "ISA‑style" shelter. You contribute after‑tax dollars, which means you don’t get a tax deduction today, but every withdrawal after age 59½ is tax‑free, including earnings. The 2025 contribution limit is $6,500, or $7,500 if you’re 50 or older. You can invest in stocks, bonds, mutual funds, or ETFs, giving you flexibility to match your risk level.

If you prefer a tax deduction now, a Traditional IRA might fit. Contributions may be tax‑deductible, but you’ll pay income tax on withdrawals in retirement. For those with a workplace plan, a 401(k) works similarly to a Traditional IRA, often with employer matching that boosts your savings.

Best ways to use a US ISA

Start by picking a low‑cost broker that offers a Roth IRA with no account fees. Choose index funds or target‑date funds that spread risk and keep expenses low – typically under 0.1% per year. Automate a monthly contribution; even $100 a month adds up fast thanks to compounding.

Make sure you stay under the annual limit. If you earn too much, you might be phased out of direct Roth contributions, but a "backdoor" Roth (converting a nondeductible Traditional IRA) is a legal workaround. Keep an eye on the five‑year rule for Roth conversions to avoid early‑withdrawal penalties.

Avoid common pitfalls: withdrawing earnings before age 59½ usually triggers taxes and a 10% penalty unless you qualify for an exception (first‑time home purchase, qualified education expenses, etc.). Also, don’t treat the Roth as a short‑term savings tool; the real power comes from letting it sit for decades.

Finally, revisit your account yearly. As your income grows, you might be able to increase contributions or shift to a larger employer plan. Rebalancing your investments every 12‑24 months keeps your risk in check and ensures you’re not over‑exposed to a single sector.

Bottom line: the US version of an ISA is all about choosing the right tax‑advantaged account, funding it consistently, and letting the money work for you. Open a Roth IRA today, set up automatic deposits, and watch your future self thank you.