How the $1,000 ‘Trump Accounts' would compare to other savings plans
The Senate Finance Committee's version of the big tax-and-spending bill included the proposal for the Trump Accounts.
There is a new type of investment account for children in the big tax-and-spending bill, but it has strings attached.
These so-called Trump Accounts, which for the next few years would be automatically funded with $1,000, are part of the bill that the Senate Finance Committee introduced on Monday. Lawmakers put the provision in the version that passed in the House last month.
The proposal continues to be discussed and refined in coordination with the Trump administration.
The free $1,000 might be nice, but the accounts themselves offer fewer tax advantages and lower caps on contributions than 529 accounts. They also have more limited investment choices than custodial brokerage accounts.
The accounts would launch in 2026 for any U.S. citizen under age 8. Children born between 2025 and 2028, would get the $1,000, provided both parents have work-eligible Social Security numbers.
Parents and relatives could contribute up to $5,000 annually in after-tax dollars until the child turns 18, a limit that would increase annually with inflation. The funds must be invested in a diversified index fund tracking U.S. equities, with the Treasury Department overseeing the program and banks or other financial institutions managing administration.
If parents don't open an account by the time they claim their child on a tax return, the Treasury will create one automatically.
Withdrawals could begin at age 18, when account holders may access up to half their balance for higher education, job training, small-business expenses or a first-time home purchase. Qualified withdrawals are taxed as long-term capital gains. Use the money for anything else, and it is taxed as ordinary income, generally a higher tax rate than long-term capital gains, with a 10% penalty.
At age 25, the full balance would become available for those same purposes. Trump Account funds must be used by age 31, or they are taxed as ordinary income.
If a child receives the $1,000 seed at birth and no additional contributions are made, the balance could grow to roughly $3,380 by age 18, assuming a 7% annual return, says Catherine Valega, a Boston-area certified financial planner. If parents contribute the maximum $5,000 each year from birth through age 17, a total of 18 years, the account could reach about $170,000 under the same assumptions.
Trump Accounts are like a mix of Roth IRAs, 529s and brokerage accounts, but with more strings attached.
They are funded with after-tax dollars, like Roth IRAs. But investment gains are taxed at withdrawal—typically at capital-gains rates for qualified uses, or as ordinary income plus a penalty for everything else.
They are designed primarily for specific uses, much like 529 plans. But because the investment options are restricted to equities, it could be harder to scale down the risk as a child gets closer to, say, using the money for college. 529s typically offer age-based portfolios that shift from stocks to bonds as children grow older.
Custodial brokerage accounts offer more investment options, letting parents buy individual stocks, exchange-traded funds or other assets.
Unlike 529 plans, Trump Account contributions wouldn't qualify for a state tax deduction, even in states that offer one for 529s.
'Flexibility is really important to young families," said Miklos Ringbauer, a financial adviser in California. 'If you think your child might not go to college or might delay buying a home, other savings vehicles are more adaptable."
Parents can contribute up to $5,000 a year, but unlike with 529 plans, they can't front-load five years worth of contributions. With a 529, individuals can contribute up to $95,000, or $190,000 for married couples, this year without triggering the gift tax.
Unlike 529s, Trump Accounts don't allow parents to transfer funds to another beneficiary if one child doesn't use the money. With a 529, parents can now roll up to $35,000 into a Roth IRA for the same beneficiary, as long as the 529 account has been open for at least 15 years and the beneficiary has earned income in the year of the rollover.
The accounts were originally branded MAGA Accounts, short for 'money accounts for growth and advancement," but House Republicans later amended the bill, renaming them Trump Accounts.
Financial planners say the political association could influence participation rates, especially among families skeptical of Trump or wary of government-managed investment programs.
Even some Trump voters are uneasy about the branding. Stephen Kneubuehl, a 38-year-old tech entrepreneur in Denver who said he voted for Trump, supports the idea of early savings. He opened custodial investment accounts for his nieces and nephews at their first Christmas and plans to do the same for his own future children.
But he takes issue with the Trump-branded name. 'It's not his money being given out," Kneubuehl said. 'It's the American people's money. I'd rather it have a more generic, optimistic name."
Write to Dalvin Brown at dalvin.brown@wsj.com
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