Don’t turn down the free money assuming these accounts really do become law, but there is less here than meets the eye
The Trump Administration’s Big Beautiful budget bill working its way through Congress proposes to deposit $1,000 into an account for each U.S. citizen child born between 2025 and 2028.
That money must be invested into a U.S. stock index fund, with withdrawals permitted starting at age 18 for education expenses or credentials, first home purchases, or starting a small business.
Of course, this is all still in the proposal stage and may not be adopted as written, but here is a quick and simplified summary of the accounts and what they might mean for your family from my perspective as a financial planner:
Don’t turn down the free money
Parents of children entitled to the funds can open an account for them and capture the $1,000 government handout. If they don’t open an account, the Treasury will do so automatically for the child.
Look, it’s $1,000 of free money. Assuming an annual return of 7%, the money will grow to roughly $3,380 from birth to age 18. The beneficiary can withdraw one-half or $1,690 at age 18 but be aware that capital gain or ordinary income taxes will apply, plus penalties in some cases, thereby reducing the value of the withdrawal.
The beneficiary can withdraw the estimated remaining balance of $2,891 at age 25. Again, taxes will apply.
Does this sound life changing? Definitely not for families of means, although it will be a meaningful bonus for families without other resources. The verdict? It’s free money, and there is no reason not to take it.
But should you add your own contributions?
Parents and others can add up to $5,000 of their own money per year to the accounts until the beneficiary turns age 18.
But why would they? These Trump accounts are restrictive and taxable. Better to save in a 529 college account (no taxes and few restrictions) or in a personal brokerage account (low taxes and no restrictions). To paraphrase, these accounts are a day late and a dollar short.
The bottom line
The Trump baby accounts do have the virtue of introducing a broader swath of American households to the wonders of stock investing, and that is truly significant. At present, around 58% of U.S. households own a piece of the American dream through direct or indirect investments in U.S. companies. As the gulf widens between workers and owners, it does seem beneficial to induct more citizens to the ownership class so they have the potential to create wealth by owning a growing stake in the USA. With that goal, the Government might consider multi-year rather than one-time contributions to make these accounts more impactful.
On the other hand, this proposal seems to entail significant logistical costs (e.g. opening, maintaining, and funding millions of new investment accounts for U.S. babies and toddlers at an estimated total cost of $13 billion). Many of those don’t need the money. And of course, it’s yet one more account with its own set of idiosyncratic rules that advisors and parents alike will puzzle over. People barely understand the rules for 529s, IRAs, Roths, SIMPLEs, 401(k)s, student loans, and so on. Why add to the confusion? Congress would do better to simplify and streamline the mess that already exists. Many people fail to save because they don’t understand how to do so and these new accounts – as always – come with too many rules, restrictions, and taxes.