Among the 1,000-plus pages of President Trump’s tax bill is a proposal that would put federal money into accounts for babies born during his second term.
Initially dubbed “Money Accounts for Growth and Advancement” (MAGA), the savings proposal was recently renamed “Trump account.”
Sen. Ted Cruz (R-TX), who is credited with coming up with the idea, calls the $1,000 investments “transformative” for future generations.
“There are many Americans who don’t own stocks or bonds, are not invested in the market, and may not feel particularly invested in the American free enterprise system. This will give everyone a stake,” Cruz told Semafor.
The idea itself, to give babies a financial head start when it comes to education, homeownership and financial success, is not new, however. A similar plan has been implemented in Connecticut, and another has been proposed by Sen. Cory Booker (D-NJ).
Who is eligible?
Under Trump’s “big beautiful” bill, qualifying babies born between Jan. 1, 2025 and Jan. 1, 2029 would receive $1,000 in a Trump account opened by their parents or the Treasury.
To be eligible, the newborns would have to be U.S. citizens and have a Social Security number. A parent must also provide a Social Security number to show they are eligible to work, according to the bill.
“If the Secretary of Treasury determines that an eligible individual does not have an accountopened for them by the first tax return where the child is claimed as a qualifying child, theSecretary shall establish an account on the child’s behalf, taking into account, to the extentpossible, the parents preferred custodian and investment fund,” the bill reads. “Parents will be provided the option to opt out of the account.”
How does the account work?
Families would have the option to add up to $5,000 a year, with the account holder unable to take distributions before age 18. Contributions from tax-exempt entities, such as private foundations, aren’t subject to the $5,000 cap.
At the age of 18, additional investments would be capped, but the named account holder would be able to access up to 50% of the money to pay for higher education, training and first-time home purchases.
At age 30, account holders would have access to the full balance for any purpose.
The money would be invested in a U.S. equity index fund and taxed as capital gains if spent on qualified expenses, according to retirement publication Plan Adviser. Withdrawal of the money for non-qualified purchases would be penalized and taxed as ordinary income.
Michael Piwowar and Robert Shapiro, of the Milken Institute, published a paper analyzing the growth prospects of such an account and found that, on average, the $1,000 investment would grow to $8,000 after 20 years, $69,000 after 40 years and $574,000 after 60 years.
Financial experts react
A number of experts reacted favorably to the creation of the accounts, but questioned the structure.
“The MAGA accounts proposal is an encouraging step—but it misses a critical piece,” Zach Buchwald, CEO of Russell Investments, told Plan Adviser in a statement earlier this month. “If we want true financial security, we need long-term solutions that include retirement. Let’s give every young American a chance to build real wealth—not just a starter fund.”
Others asked why families would put money that has already been taxed into an account that doesn’t allow you to take it out tax-free, when there are options such as the 529 college savings plan, or Roth IRA that would allow them to do just that.
“The giving kids money aspect is generally good,” Zach Teutsch, a managing partner at Values Added Financial, told Yahoo Finance, but called the account structure “ill-considered” since families who choose to fund a Trump account over a tax-advantaged 529 plan would seemingly be “shockingly sure” their child wouldn’t be going to college.
Meantime, Trump accounts will only become a reality if the administration’s “big, beautiful bill” makes it through the Senate, which could involve a rewriting process in order for the package to garner 51 votes.
Should the bill pass without changes to Trump accounts, financial writer Jim Wang has this advice: “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 toward the account as the child ages. For education expenses, you’re better off contributing into a 529 plan.”
The Associated Press contributed to this report.
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