On the face of it, the so-called “Trump accounts” — which would provide parents of newborns with $1,000 to invest on behalf of their child’s future — would be a plus for many families.
“It’s a pro-family initiative that will help millions of Americans harness the strength of our economy to lift up the next generation, and they’ll really be getting a big jump on life,” President Donald Trump said Monday at a White House event.
The five-year pilot program, which is included in the House-passed budget bill — also known as the “One Big Beautiful Bill Act,” now under consideration in the Senate — could give a financial leg up to a new generation to build savings for their education and beyond.
While the proposal has its merits, it may not do as much as it could to help the tens of millions of families who will struggle to save for their children.
“This proposal meets some, but not all, of the best practices recommended by decades of research on early wealth-building programs,” said Madeline Brown, a senior policy associate at the Urban Institute, a Washington, DC-based think tank.
Here is a look at how the program would work and who is likely to benefit most.
Under the proposed “Trump accounts” — initially called “Money Account for Growth and Advancement” (MAGA) accounts — the federal government would put $1,000 into individual accounts for babies born between January 1, 2025, and December 31, 2028.
To be eligible, the baby must be a US-born citizen, and both the parents and the baby must have Social Security numbers.
The family and others may make annual contributions to the account so long as combined they don’t exceed $5,000 a year, although nonprofits may be able to donate more.
The money must be invested in a low-cost, diversified US stock index fund or equivalent, and no withdrawals may be made until the child turns 18. Taxes are deferred on growth until the money is withdrawn.
The account is intended for expenses tied to higher education or “post-secondary education credentialing,” buying a home or starting a small business.
Distributions for qualified expenses will be treated as capital gains, which are taxed at a lower rate than ordinary income. But they will be taxed as ordinary income and subject to an additional 10% tax if an under-30 beneficiary uses them for other expenses.
Pros and cons
The pilot program gets good marks on two fronts:
It will be universal and automatic: Parents won’t have to do much to set up the account. “It will maximize inclusion,” Brown said. “(Research shows) if you have an opt-in program, you’re likely to see higher income families enrolling at higher rates.” That may be due to their having both greater awareness of the program and greater liquid assets that can be put toward savings, she said.
It establishes federal assistance from Day 1 of a child’s life: There has been bipartisan support for programs like “baby bonds,” which are publicly funded trust accounts to give newborns a financial headstart. Although some states and cities have created similar programs, no federal initiative has been set up to date.
But, as proposed, the pilot program diverges from the best practices cited in early wealth building research in that:
It is regressive: Every family — rich or poor, regardless of need — would get the same $1,000 per newborn.
And because families with greater means will have a much easier time making their own contributions to the accounts on top of the initial $1,000, those families are likely to end up with far greater savings accumulation at the end of the day.
In a report in March, the Milken Institute estimated that $1,000 invested in a broad equity index fund would grow to an average of $8,300 over 20 years.
Any other savings contributed along the way by the family or the employer of the parents could greatly increase that account balance.
If a family can’t put in more on top of the initial $1,000 by the federal government, having $8,300 by age 20 is certainly better than nothing. Still, it may not go far in financing a college education or a down payment on a home.
“The structure favors families who already have the means to save. It’s regressive by design,” said Michelle Dallafior, senior vice president of tax and budget at First Focus for Children, which noted on May 29 that the House reconciliation bill includes many provisions that would negatively impact lower income families.
The withdrawal rules are complex: Early wealth building programs work best when they provide ease of access and use, Brown said.
But the current proposal’s withdrawals are confusing and limiting. For instance, only half of the cash value of the account may be withdrawn between the beneficiary’s 18th and 25th birthdays.
Brown also notes there is no allowance for emergency use of the funds. That means families and beneficiaries would pay a penalty for early withdrawal.
Read the full article here