As part of the “Big and Beautiful Act” signed on July 4th, the new savings tool supported by the Republican Party – Trump Accounts – will gift a $1,000 long-term savings startup fund to every eligible newborn in the United States. These accounts are designed to provide support to American citizen children born between 2025 and 2028, helping families accumulate intergenerational wealth from the birth of their babies, marking one of the most ambitious attempts by the federal government in decades.
Just by checking the corresponding option on their tax return, each account will receive a one-time $1,000 government initial investment. Similar to Individual Retirement Accounts (IRAs), parents, family members, employers, and even non-profit organizations can contribute up to $5,000 annually to each account. The funds in these accounts will be invested in the U.S. stock index.
Although parents won’t enjoy tax deductions when contributing to the new accounts, employers can apply for tax benefits for contributions to their employee’s children or teenage employees. Non-profit organizations can also contribute to these accounts. The funds can benefit from tax-deferral until the beneficiary reaches 18 years old when withdrawals can be made, subject to certain restrictions.
Supporters believe that the compound interest effect makes these accounts valuable long-term tools. With a 6% return rate investment and no withdrawals, the $1,000 initial deposit can grow to nearly $2,854 by the time the child turns 18.
However, limitations of the account include the inability to withdraw funds before a child reaches 18 years old; withdrawals will be subject to regular income taxation; parents withdrawing funds before the age of 59 and a half will face a 10% penalty unless the funds are used for specific approved purposes, including paying for college tuition, purchasing a first home (up to $10,000), dealing with natural disasters, addressing disabilities or domestic violence, or covering related expenses after the birth of a newborn (up to $5,000).
These accounts do not offer tax deductions, and earnings are taxed at regular income tax rates rather than the more favorable capital gains tax rates applicable to standard brokerage accounts.
Some analysts believe that compared to the “Trump Accounts,” the existing “529 Plans” specifically designed for education savings offer greater flexibility, a wider range of investment options, and better tax benefits.
For instance, by 2025, individuals can contribute up to $19,000 annually to a 529 Plan, while married couples can invest up to $38,000. In contrast, the annual contribution limit for “Trump Accounts” is $5,000, and they are limited to one type of investment: a stock index tracker.
However, “529 Plans” are restricted to educational purposes, while the new accounts can continue to benefit the recipient beyond college education.
One of the supporters of this legislation, Republican Congressman Blake Moore from Utah, stated that while Trump Accounts may not be as suitable for educational purposes in terms of tax optimization as 529 Plans, their long-term retirement savings potential makes them more valuable, especially for families unable to invest elsewhere.
Republican lawmakers refer to these accounts as “Trump Accounts,” but the proposal to officially name the account after the president’s name was not included in the final legislative text, which was signed into effect last Friday.
This plan fulfills a longstanding bipartisan concept proposed by Democrats and Republicans: to invest funds for all newborns.
The White House stated that these accounts “will provide a chance for a generation of children to experience the miracle of compound growth and set them on the path to prosperity from the very beginning.”
(This article references reports from CNN and The Washington Post)