Republicans in the House of Representatives passed the GOP “One, Big Beautiful” budget bill which included a provision for Trump Accounts.
Previously called “MAGA Accounts Contribution Pilot Program,” in which MAGA stood for Money Account for Growth and Advancement, this provision is similar to the $5,000 Baby Bond suggested by Senator Hillary Clinton when she was running for President.
What is a Trump Account?
The Trump Account is a tax-deferred investment account that the Treasury Department would set up automatically for each eligible child born in 2025 through 2028. They call it a savings account but it will act more like a brokerage account.
The child must be a U.S. citizen at birth, have a Social Security Number, and be born to parents who both have Social Security Numbers.
Parents can also contribute up to $5,000 per year into this account for their children.
The assets in a Trump Account would grow tax free but would be taxed at long term capital gains rates when withdrawn if they are used for qualifying expenses. Qualifying expenses include education, first time home, and even capital for starting a business.
Half of the funds can be withdrawn once the child turns 18. If the funds are not used for a qualifying expense, it would be taxed as income. After 30, all the funds can be withdrawn for any purpose.
How Does This Compare with a 529 Plan?
It’s natural to compare this with another tax advantaged account often used for education. 529 Plans are, in many ways, far superior though it does lack one beneficial feature of the Trump Account – the Treasury sending a child $1,000 just for being born.
If you use 529 funds for qualified educational expenses, you pay no tax. While long term capital gains rates are quite favorable, they’re not nearly as favorable as zero percent.
529 Plans also have the nice new feature in which you can transfer funds into a Roth IRA subject to certain limits and conditions. This means that if you contribute too much to a 529 plan, there’s a buffer amount you can always transfer into a Roth IRA. The lifetime limit of transfers is $35,000 – which is quite significant.
Trump Accounts do include buying a first home and starting a business as qualified expenses, but you are still subject to long term capital gains tax.
Trump Accounts Are Not Yet Law
The House of Representatives has passed a version of the bill but the Senate has yet to take it up. We will see whether the Senate version keeps the Trump Accounts as is or if they will make adjustments.
If it remains unchanged, you might as well take the free $1,000 that comes with automatic enrollment of a Trump Account but there’s little reason to contribute more towards the account as the child ages. For education expenses, you’re better off contributing into a 529 plan.
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