Trump Accounts Add Confusion to Savings Accounts Without Adding Much Benefit
Let's simplify this system instead of making it even more complicated.
When President Donald Trump rang the opening bell for the New York Stock Exchange and the NASDAQ on July 6, it wasn't to celebrate a new stock market high or the IPO of a trillion-dollar U.S. company. It was to launch the new "Trump Accounts," an investment vehicle targeted at children (and their parents). The Trump administration has made much fanfare of these accounts, which were authorized by the One Big Beautiful Bill Act and first became available this month. Are they really a good option for individuals, and for the nation as a whole?
The United States has a plethora of tax-protected accounts, some of which are intended for retirement and some of which are intended for spending on specific things, such as education or healthcare: IRAs, Roth IRAs, 401(k)s, HSAs, 529 accounts, and so on. The easiest way to understand Trump Accounts is to compare them to these other types of accounts.
For Trump Accounts, withdrawals can't be made before age 18. After then, the Trump Accounts are treated the same as traditional IRAs, meaning you pay taxes on the withdrawals based on your other income taxes. That sounds like a good deal, since 18-year-olds are probably in a low income-tax bracket—but unlike with traditional IRAs, the deposits into the Trump Accounts aren't tax deductible. In that sense, they are like Roth IRAs or 529 accounts (education savings plans), since the contributions are made with after-tax dollars. And with traditional IRAs, you can't withdraw before age 59 and a half without paying a penalty, though the penalty (but not the taxes) will be waived if the funds are spent on certain expenses (such as education or buying a first home).
Confused already? Taxes and tax-protected accounts are very confusing, often unnecessarily so. If you are planning to make a big contribution to these accounts (which have $5,000 annual limits), you should certainly talk with your accountant (or get one) to see if there is a better way to save for whatever your goals are. (Retirement? Paying for college? Minimizing taxes?) For most savings goals, there is probably a better option, as the Cato Institute's Adam Michel has shown when comparing Trump Accounts to HSAs and IRAs.
For most families with very young children—those born between the beginning of 2025 and the end of 2028—the federal government will seed these accounts with $1,000. That may be great for the family, but it is a questionable public policy in a world where the federal government is already running nearly $2 trillion annual budget deficits. The Trump Account seed funding will probably just be a small drop in a really big bucket of debt for the federal government, but this is moving fiscal policy in the wrong direction at a time when we desperately need to move in the right direction.
How much could that $1,000 grow? That depends, of course, on how the money is invested and how those investments perform. The official webpage for the Trump Accounts has posted some sample scenarios. For example, if you just take the $1,000 initial payment and don't add any new contributions, the account could—could—be worth $6,000 by age 18. But that sixfold multiplier of the $1,000 assumes that the funds are invested in the S&P 500 and it returns 10.5 percent over those 18 years. (The investments are restricted by law to low-cost index funds.) That's a fine assumption, as it is the historical average, but since these accounts are targeted at investors who may not be very savvy, that $6,000 might sound like a guarantee.
Aside from that potential confusion, it is worth emphasizing that the $1,000 could also become $6,000 if you invested it in some other type of account—whether a 529 education savings account or a non-tax-protected ordinary brokerage account. There is nothing magical about the Trump Account in this respect. The only potential upside is if the Trump Account offers you better tax treatment. Again, check with your accountant, but this is no guarantee either. If you are saving the money for college, it is likely that a 529 account will be better, as these can be withdrawn completely tax-free if used for qualifying expenses. And 529 accounts (or up to $35,000 of them) can eventually be rolled over into Roth IRAs if you end up not using the funds for education. As a cherry on top, states with income taxes often offer their own deduction or credit for contributions to 529 accounts.
Is there something better than Trump Accounts that Congress could create? In an ideal world, income tax rates would be low enough that you wouldn't need to worry too much about protecting your income from taxation. But given current budget deficits and looming entitlement payment challenges, large income tax cuts probably aren't on the table.
Given the large and confusing number of tax-protected accounts, one good reform would be for Congress to junk all the IRAs and similar accounts and just introduce a Universal Savings Account. Already used in Canada and the U.K., such accounts would allow you to make contributions (with an annual limit) that grow tax free; you'd be allowed to make withdrawals whenever you want, for any reason, with no penalty.
Trump Accounts just add more complexity to the existing suite of accounts without adding much benefit, while Universal Savings Accounts could simplify the system and provide most Americans with a huge benefit: penalty-free withdrawals at any age.
