What to know about $1,000 “Trump accounts” for newborns included in House bill

The Trump administration has proposed a new initiative to kickstart wealth creation for American children by creating $1,000 “Trump accounts” for babies born during President Trump’s second term in office. Originally named “money account for growth and advancement,” or “MAGA” savings accounts, these renamed accounts would be managed by banks or investment firms and operate like traditional investment accounts. Here’s a detailed look at what to know about the proposed “Trump accounts” for newborns.

What are they called?
House Republicans recently submitted an amendment to President Trump’s domestic policy bill, proposing to change the original “MAGA” acronym to “Trump accounts” in honor of the president. This amendment aims to establish these accounts for newborns born in the U.S. between Jan. 1, 2025, and Jan. 1, 2029, who have Social Security numbers, along with parents who also have Social Security numbers. The U.S. Treasury would set up and fund these accounts.

Who would get one?
Automatic enrollment is a key feature of the proposed pilot program, ensuring that every eligible child is included in the initiative. Madeline Brown, senior policy associate at the Urban Institute, highlighted the importance of automatic enrollment, especially for low-income families who may not be familiar with such investment opportunities. By automatically enrolling children, the program aims to reach those who could benefit the most from this financial boost.

What would be in a “Trump account”?
Each eligible child would receive a $1,000 government contribution to their account, which would then be invested in the stock market on their behalf. Families and third parties could also contribute up to $5,000 annually to a child’s account. While similar programs exist in various states, the proposed “Trump accounts” offer a unique opportunity for children to begin building wealth from a young age.

What could the money be spent on?
Accountholders would be permitted to use the funds for specific expenses, such as a down payment on a home, education-related costs, or starting a small business. However, Brown emphasized the need to broaden the scope of approved expenditures to ensure that children can access the funds for essential purposes. Without additional contributions, low-income families may struggle to accumulate enough funds for significant expenses like a down payment on a home.

When could the funds be withdrawn?
Half of the funds could be withdrawn when a child turns 18, with the gains taxed at the long-term capital gains rate if used as directed. Withdrawals for other purposes would be taxed as income, with a potential 10% penalty for misspending the money. Brown suggested improvements to the program structure, particularly regarding how account withdrawals are taxed, to better support low-income families who may face unexpected financial challenges.

Overall, the proposed “Trump accounts” offer a unique opportunity for American children to begin their financial journey early in life. By providing a financial boost and investment opportunity, these accounts aim to foster wealth creation and economic empowerment for future generations. When it comes to saving money, there are plenty of options available that don’t come with the risk of a tax penalty for early withdrawal. According to financial experts, there are alternative accounts that can offer similar benefits without the drawbacks of the proposed child savings accounts.

Brown, a financial advisor, suggests looking into other savings options that don’t have the same tax implications. “There are other places you can save money where you won’t have that tax penalty if you withdraw the funds early,” Brown said. This advice is crucial for those looking to save for their children’s future without the fear of being penalized for accessing the funds before a certain age or timeframe.

Taube, a financial expert from Nerdwallet, also raises concerns about the tax benefits of the proposed child savings accounts. Despite being marketed as tax-advantaged accounts, Taube believes that they may not offer significant advantages over traditional taxable brokerage accounts. “Although they are advertised as tax-advantaged accounts, the way they work does not seem to be that different from how a taxable brokerage account would work,” he told CBS MoneyWatch. This skepticism highlights the importance of thoroughly researching and understanding the financial products available before committing to a specific savings strategy.

However, Taube acknowledges that the proposed child savings accounts could still be beneficial for families looking to save for their children’s future expenses. “Given the state of saving for children’s future expenses in this country, the accounts do seem like they could help at least somewhat,” Taube said. While there may be uncertainties surrounding the tax benefits of these accounts, they could still serve as a valuable tool for families seeking to secure their children’s financial future.

In conclusion, exploring alternative savings options and understanding the potential benefits and drawbacks of different accounts is essential for making informed financial decisions. By consulting with financial experts and staying informed about the various savings vehicles available, individuals can ensure that they are making the most of their savings efforts without unnecessary tax penalties or limitations.