Nestled in the massive budget reconciliation bill working its way through Congress is a provision that would create a new financial tool for families with children.
Under the One Big Beautiful Bill Act, approved by the House and now in the Senate, parents could open a so-called Trump account — earlier proposed as Money Accounts for Growth and Advancement, or “MAGA,” accounts — for children younger than 8.
Parents and other relatives could contribute up to $5,000 annually, a cap that would be adjusted for inflation and wouldn’t apply to contributions from the government and nonprofits. The money is added after taxes but growth is tax-deferred.
The U.S. Treasury would make a one-time $1,000 contribution to the accounts for qualifying U.S. citizens born in the country from Jan. 1, 2025, to Dec. 31, 2028. If parents don’t open an account for qualifying babies, the government would establish one on the child’s behalf, although parents could opt out.
Unlike 529 savings plans, designed primarily to pay for higher education, the proposed accounts would allow beneficiaries to use the funds for a broader range of expenses, such as home purchases and starting new businesses.
The accounts, to be administered by financial institutions and overseen by the Treasury Department, are designed to promote education, entrepreneurship and homeownership as well as financial security, according to the legislation. Assets would be invested in a diversified fund that tracks an established U.S. equities index.
These accounts “will be significant for families who will be eligible for a contribution from the federal government,” Erin Koeppel, managing director, government relations and public policy counsel at the Certified Financial Planner Board of Standards, told ThinkAdvisor.
“For many families, this will be an important wealth-building event, and we hope it will address some of the inequities that we see in the financial world, given that account holders and their families will have an opportunity to learn about personal finance. It's also a way for the government to facilitate financial literacy,” she added.
Contributions to the accounts must stop once the child reaches 18, when account holders will first be allowed to take distributions. They would be able to access up to 50% of their funds for higher education, training programs, small-business loans or first-time home purchases.
At age 25, accountholders would be allowed to withdraw any amount up to the full account balance for such purposes, and at age 30, they’d be able to withdraw the full balance for any purpose. Distributions taken for qualified purposes are to be taxed as long-term capital gains, while distributions for other purposes would be taxed as ordinary income.
When the beneficiary turns 31, the “Trump account” would end and any funds would be treated as distributed.
The proposal has broad bipartisan support, Koeppel noted.
While the pilot program that would give $1,000 to infants born in the designated time period would be available to anyone, no matter the family’s income, the contribution would mean more to certain recipients, she said.
“So it's designed to help everyone, but undoubtedly that thousand dollars that a lower-income or a middle-income family would receive through this program would be much more impactful and significant to them,” said Koeppel.
One potential issue is that beneficiaries might forget their accounts, as has happened for some people with 401(k) plans, she said.
“There is some concern that I have in the back of my mind that something like this, people just may lose track of these funds over the course of their life," she said. "And so I think that's something that we'll have to think about, to the extent this gets put into place, to make sure people actually know that they have this money and benefit from it.”
Trump Accounts vs. 529 Plans
The accounts would differ from 529 plans but may complement them, she said.
Anyone can be a 529 plan beneficiary, and the investment options vary state to state, but there’s typically more variety than what is contemplated in the proposed Trump accounts, which would be tied to an index fund, Koeppel noted. And only children under 8 years old would be eligible for Trump accounts.
In addition, the federal government doesn’t contribute to 529 plans, which allow much bigger contributions and tax-free withdrawals for qualified expenses, she noted.
“So the tax advantages are different” and each person would need to consider what’s best for their own personal financial situation, Koeppel added.
It is unclear how Trump account money would be treated on applications for college financial aid. But if it's treated as a student asset — which appears likely, according to Savingforcollege.com — it would have a far bigger impact on the child's eligibility for need-based aid than would the same amount saved in a parent's brokerage account.
Planning Impact
What would these accounts mean for financial advisors' converations with their clients?
"I think these accounts would be yet another tool in a financial planner's toolkit. And I think, again, depending upon how these accounts actually look once they're signed into law," said Koeppel.
"This is a highly personalized process for financial planning and it takes into account each client's personal and financial circumstances. And that's why from CFP board's point of view, working with someone who's committed to acting as a fiduciary, as all CFP professionals commit to doing, that really helps them reach their full potential," she said. "There's so many wrinkles and different types of accounts and things out there that this would be one of a essentially a suite of things that would be available to consider when you're looking at someone's overall financial plan."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.