An important provision in the One Big Beautiful Bill Act passed by the House of Representatives is the creation of the Trump Accounts. According to a Forbes article, these savings accounts will be funded by the federal government and they will provide each baby born between January 1, 2025, and December 31, 2028, with $1,000 for investment. This benefit is a unique solution to some of the problems plaguing taxpayers who struggle to invest in their and their children’s future. The Milken Institute estimates that this $1,000 investment would grow to over $8,000 by the time the child reaches the age of 18, providing substantial financial support that can be used for education, starting a business, or property ownership. According to CNBC, business leaders like Michael Dell (Dell Technologies), Dara Khosrowshahi (Uber), and David Solomon (Goldman Sachs) have all pledged significant support for this proposal.
Despite the benefits of receiving $1,000 from the federal government, the initial set of rules is complicated, and there are three crucial tax considerations based on the current drafting of this provision.
1. The Money In the Trump Savings Accounts Grows Tax-Deferred
Stock prices go up and down on a continuous basis. Investors do not pay taxes on those fluctuations. When investors dispose of their stock, they recognize a gain or loss on the difference between the purchase price and the sales price. However, if the stock is invested in a retirement fund (i.e., a 401k or IRA), then the gain is deferred until the money is withdrawn from the account. This allows the account to grow tax deferred.
Tax deferral is a valuable financial tool since it allows taxpayers to pay current tax liabilities at a future date. Given that inflation typically hovers around a couple of percentage points, time value of money principles suggest that deferring tax liability to a future year can save the taxpayer significant amounts of money. This deferral also applied to the Trump Accounts. Taxpayers’ children will receive this $1,000, and the money will be invested and tax deferred. Once the child turns 18, the money can be withdrawn, and the person can pay taxes on the difference between the current value and the initial amount invested.
2. Some Gains From The Trump Savings Accounts Will Be Capital, Others Gains Will Be Ordinary
Built into the rules is a complex treatment for how the gains will be taxed. According to the Tax Foundation, if the funds are withdrawn and used for school tuition, a first-time home purchase, or a small business expense, they will be subject to capital gains tax. In 2025, single taxpayers who earn less than $48,350 pay 0% capital gains tax. As a typical 18-year-old does not make above this amount, these individuals will tend not to face a tax liability if the funds are applied toward one of these qualified activities.
However, if the funds are applied toward a non-qualified activity, the individual will pay taxes on the gains at an ordinary rate. Even among the lowest-earning taxpayers, they would face a 10% income tax rate on this income.
3. The Trump Savings Accounts Are Regressive
Even though the program provides a universal and automatic benefit to taxpayers, according to CNN, it is regressive in nature. Being regressive means that due to some of the tax considerations, it has the potential to benefit higher-earning taxpayers relatively more than lower-earning taxpayers. This relative benefit that makes it regressive is twofold.
First, higher-earning taxpayers have a larger tax benefit from these funds. For instance, consider a married taxpayer with $1 million in taxable income. If this taxpayer invests $1,000 for their child when born, the high-earning taxpayer would owe 37% tax on the growth in the fund (20% if the growth receives preferential capital gain treatment). Meanwhile, a married taxpayer with a taxable income of $75,000 would only face a 12% ordinary income tax rate and would not owe any taxes if the gain qualifies for the preferential capital treatment. Thus, the tax treatment for this program has a relatively larger benefit for the higher-income taxpayer.
Second, while the federal government will provide $1,000 to all children born during the specified time period, the child can have these contributions of up to $5,000 per year. Even though nothing expressly prohibits families from contributing additional funds to their children’s account, this portion of the provision has a clearer benefit for higher-earning families, who are in a better position to provide the additional contributions. Put differently, this provision of the One Big Beautiful Bill Act allows taxpayers a vehicle to defer taxes, and this vehicle can be taken advantage of by higher-earning taxpayers generally more easily than lower-earning taxpayers.
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