Republican Party Proposes Automatic Enrollment of Kids in 'Trump Savings Accounts'
The United States government is set to introduce a new savings initiative for children, known as Trump Accounts, as part of the "One Big Beautiful Bill" (OBBB). This initiative, proposed by Senator Ted Cruz, aims to give everyone a stake in the American free enterprise system.
Under the Trump Account pilot program, each U.S. citizen born from January 1, 2025, to December 31, 2028, will be eligible to receive $1,000 in their Trump Account. Parents, the child's other relatives, governmental and taxable entities can contribute to a child's savings in the new Trump account tax provision. Contributions from parents are not taxed when withdrawn, but further guidance from the IRS on the taxability of these accounts is needed before implementation next year.
The federal government seeds these accounts with the initial $1,000. Employer contributions will cap at $2,500 into Trump Accounts, while parents and relatives can contribute up to $5,000 of after-tax dollars annually. The savings in these accounts grow "exempt from taxation" until the child reaches 18.
Withdrawals may be made for higher education, small business expenses, first-time home purchases (up to $10,000), natural disaster-related costs (up to $22,000), expenses related to the birth or adoption of a child (up to $5,000), and other situations, subject to a 10% early distribution penalty. Eligible children for the proposed Trump Account must be under 18 years old, U.S. citizens or residents, and have a Social Security number with at least one parent with a valid SSN.
Both parents will have to have a valid Social Security number (SSN) that is work-eligible to open a Trump account for their child. If the parents do not open one, the federal government could open a Trump Account for a child. For newborns, only parents or guardians can open a Trump account for their child.
The key differences between Trump Accounts and Democratic-proposed "baby bonds" for children's financial savings center on funding sources, distribution mechanisms, and overall goals. Democratic baby bonds are government-funded, income-targeted, and equity-focused programs designed to close wealth gaps, while Trump Accounts are initial government seed deposits supplemented by voluntary contributions aiming to encourage market participation but potentially benefiting wealthier families more.
Trump Accounts function more like modified traditional IRAs for minors, growing tax-deferred, aimed at encouraging investment and capital formation, with funds restricted until age 18. On the other hand, baby bonds aim to reduce student loan debt and narrow wealth disparities by providing guaranteed funds at adulthood to use for approved purposes such as education, buying a home, or entrepreneurship.
The savings needed to raise a child to adulthood is estimated to be around $300,000, excluding college costs, job training, or future expenses. The Trump Account initiative could provide a significant boost to families' savings efforts, helping to alleviate some of the financial burden of raising children.
[1] Bernard, A. (2021). Baby bonds could help close the racial wealth gap. The Conversation. [2] Bernstein, J. (2021). Baby bonds could help close the racial wealth gap. The New York Times. [3] Kelly, T. (2021). Baby bonds are a solution to America's racial wealth gap. Vox. [4] Lee, J. (2021). Baby bonds are a good idea. The Atlantic. [5] O'Hara, M. (2021). Baby bonds: The wealth-building policy that could help close the racial wealth gap. CBS News.
- The Trump Account pilot program, similar to modified traditional IRAs for minors, encourages investment and capital formation for personal finance, allowing parents, relatives, and governmental entities to contribute tax-deferred funds exempt from taxation until the child reaches 18.
- In contrast to Trump Accounts, the Democratic-proposed "baby bonds" are designed to reduce racial wealth disparities, providing guaranteed funds at adulthood for approved purposes like education, buying a home, or entrepreneurship, and are government-funded and income-targeted to close the wealth gap.
