The Trump administration is proposing a new initiative aimed at encouraging wealth creation among American children. The plan, included in a House bill, seeks to establish “Trump accounts” for newborns born during President Trump’s prospective second term.
These accounts, initially referred to as “money account for growth and advancement,” or “MAGA” savings accounts, would be renamed “Trump accounts” under a recent amendment submitted by House Republicans to President Trump’s domestic policy bill. The proposed accounts would be managed by financial institutions such as banks or investment firms, operating similarly to traditional investment accounts.
The program intends to automatically enroll every child born in the U.S. between January 1, 2025, and January 1, 2029, who possesses a Social Security number and whose parents also have Social Security numbers. The initiative would be federally funded and administered by the U.S. Treasury.
Madeline Brown, a senior policy associate at the Urban Institute, emphasized the importance of automatic enrollment for the proposed pilot program, particularly given some adults’ lack of familiarity with investment vehicles. Speaking with CBS MoneyWatch, Brown noted that lower-income families, who could potentially benefit most from the program, often lack awareness of such opportunities, highlighting a significant awareness gap. She added that automatic enrollment is crucial for ensuring the program reaches these families.
Under the proposal, the government would contribute an initial $1,000 to each eligible child’s account. These funds would then be invested in the stock market on the child’s behalf. Additionally, families and third parties would have the option to contribute up to $5,000 annually to the child’s account.
Sam Taube, an investment expert at the personal finance website Nerdwallet, drew parallels between the proposed “Trump accounts” and existing state-sponsored programs. However, he pointed out that the proposed federal contribution is less generous than some state initiatives. For example, Colorado’s First Step program provides every newborn with $100 in a 529 college savings account, along with a matching contribution of up to $500 per year for the first five years of savings, potentially totaling $2,500 in gift contributions.
The proposed legislation would restrict the use of funds from the “Trump accounts” to specific, approved expenditures, including a down payment on a home, education-related costs, or the initial capital for starting a small business. Account holders who utilize the funds for unapproved purposes would be subject to penalties.
Brown from the Urban Institute suggested that broadening the scope of approved expenditures could further enhance the program’s benefits for many families. She explained that for wealth building to be effective, the projected sums available to young adults at age 18 should align with the intended uses of the money. Brown also raised concerns that if lower-income families are unable to contribute the additional $5,000 annually, the accumulated funds may not be sufficient for purposes such as a down payment on a home. She noted that while the growth of a $1,000 initial investment will vary based on interest rates, it is unlikely to amount to a significant down payment without additional contributions from the community, federal, or state governments.
According to the current proposal, half of the funds could be withdrawn when the child reaches the age of 18. At this point, any investment gains would be subject to long-term capital gains tax rates, provided the money is used for approved purposes. Withdrawals for other uses would be taxed as regular income and could also incur a 10% penalty for misspending. Account holders would have full access to their balances between the ages of 25 and 30 for approved purposes, and after age 30, funds could be withdrawn for any reason.
Brown expressed concerns regarding the taxation of account withdrawals, suggesting that improvements could be made to the program’s structure. She highlighted that lower-income families would be most susceptible to needing to use the funds for unapproved expenses and thus face tax penalties. Citing a January report from Bankrate indicating that most Americans cannot afford a $1,000 emergency expense, Brown argued that low-income individuals are more likely to need to access these funds for unexpected costs. She proposed an exemption for emergency expenses as a potential solution. Otherwise, Brown stated that the benefits of the accounts might be limited, noting that alternative savings options exist without such tax penalties for early withdrawals.
Taube of Nerdwallet also questioned the tax advantages of the proposed accounts. He stated that the way they are structured does not appear significantly different from a standard taxable brokerage account. However, Taube acknowledged that given the current state of savings for children’s future expenses in the U.S., these accounts could offer some level of assistance.
Discussion about this post