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Boston Globe
05-07-2025
- Business
- Boston Globe
Your kid is getting a ‘Trump account.' Should you put your money in it?
Advertisement Republican lawmakers call the accounts 'Trump accounts,' though the Senate's plan to officially name them after the president did not make it to the final version of the legislation, which was signed Friday. They deliver on an idea that both Democrats and Republicans have floated for years: to invest money for all children at birth. Get Starting Point A guide through the most important stories of the morning, delivered Monday through Friday. Enter Email Sign Up Withdrawals from a 529 are not subject to state or federal taxes as long as the funds go toward qualified education expenses - a feature the new investment accounts don't share. And in the new accounts, parents' deposits don't qualify for a tax deduction, notes Greg Leiserson, a senior fellow at the Tax Law Center at New York University. 'You have this very slight or minimal-to-nonexistent tax benefit,' he said. 'What is the point here?' Advertisement Financial adviser Amy Spalding of Chapel Hill, North Carolina, said she will continue to steer her clients to 529s. 'It's better from a tax standpoint,' Spalding said. 'And there are more investment options. And then there's a higher contribution limit.' (For 2025, a single person can deposit as much as $19,000 a year into a beneficiary's 529, while married couples can contribute as much $38,000.) Jeremiah Barlow, a financial planner in Santa Barbara, California, said the new accounts could benefit a family that has hit the maximum on their child's 529 and wants to save more, or who like the idea of setting up a fund for their child's first home or as an economic safety net. 'It would likely appeal to our families who want more flexibility for more general-purpose savings for their child's future,' Barlow said. 'You shouldn't rush to just use it because it's out there.' Leiserson cautioned that account holders should understand the tax implications, noting that withdrawals will be taxed at typical income rates, not at the capital gains rate of a taxable brokerage account. 'For most people, this is going to be worse than what they could do in a taxable account,' he said. Though parents don't get a tax deduction when they contribute to a new account, employers can claim a tax break for contributions on behalf of their workers' children or their teenage employees. Nonprofits also can contribute to they accounts. The law requires the new investment accounts to track a U.S. stock index, which means account holders have fewer options than they would in a brokerage account or a 529 plan, which generally offer a range of investment options with varying levels of risk, including stocks, bonds and mutual funds. Advertisement Leiserson noted that all-stock portfolios come with their own risks, because they're tethered to market conditions. 'If you're saying, 'Okay, I'm going to start school in the fall' - if the market falls over the summer, the planning you were doing about how you were going to pay for college is totally messed up, because the money you thought would be there, isn't.' The White House said the accounts 'will afford a generation of children the chance to experience the miracle of compounded growth and set them on a course for prosperity from the very beginning.' While some experts appreciate the premise of the accounts, they also see flaws in the design, such as the requirement that parents opt-in to the account on their tax return, which means people who don't know this might miss out. In addition, the law includes a penalty of at least $500 if a parent mistakenly claims an account, which could scare off some parents. During the grinding process of crafting the massive tax and spending legislation, the accounts changed both superficially - they were renamed from MAGA accounts to Trump accounts to a yet-to-be-determined name - and in substance. Legislators dropped plans to give account withdrawals favorable tax treatment similar to a brokerage account. Account withdrawals will be taxed at ordinary income tax rates, not capital gains rates. Congress also discarded rules that would have prescribed how beneficiaries could spend the money - on college at 18, on starting a business at 25, on buying a house at 30. Instead, account holders cannot touch the funds until they turn 18. After that, the rules are the same as those of an individual retirement account - withdrawals are taxed like income, plus an additional 10 percent tax penalty on any withdrawals before age 59½ except for certain qualified uses. Advertisement Those uses include paying for college, supporting themselves if they become disabled, or recovering from domestic abuse or a natural disaster. Beneficiaries also can withdraw as much as $10,000 to buy their first home, and up to $5,000 when they have a new baby themselves. Even one of the Trump accounts' biggest proponents in Congress, Rep. Blake Moore (R-Utah), said in an interview that for many parents, the new account design offers more benefits for retirement than for college expenses. 'I would argue that the tax implications of a 529 are far more favorable,' he said, but noted that most families don't have the disposable income to invest in a 529, and the new accounts' $1,000 from the government can benefit people at all income levels. If the account saw a 6 percent rate of return for 18 years, it would be worth $2,854; if the stock market does well, it could be worth even more. 'The most beneficial thing in my opinion about these is that … you're investing from birth into an IRA,' Moore said. 'Most people start investing in an IRA at 30 …. We're talking at birth or at 30. The benefits of investing early into that IRA are significant.' Moore has four sons, and while none will qualify for the government's $1,000 seed money contribution for newborns, the law allows him to open a Trump account as a parent. He says he'll be putting money in it: 'I want my kids having a Trump account so they can take it out when they're 50 or 60 years old.' Advertisement Jacob Bogage contributed to this report.
Forbes
27-06-2025
- Business
- Forbes
Trump Accounts Likely To Be Less Helpful To Latinos Than Promised
Bunch of Dollars Many view the following proposal as a gift for a good start in life: the federal government will provide a one-time payment of $1,000 to each child born in the U.S. According to the official White House statement, these Trump Accounts 'will afford a generation of children the chance to experience the miracle of compounded growth and set them on a course for prosperity from the very beginning.' The question before us is whether those accounts, proposed in the One Big Beautiful Bill, can serve as a tool to reduce the wealth gap and increase the chances of individual economic success. Looking at these accounts through a Latino lens reveals that, as in most things, the details matter. The Trump Accounts And Latinos To qualify, a child must be a U.S. citizen and have at least one parent who is a U.S. citizen or a lawful resident with a valid Social Security number who pays taxes. If the parent is married, the spouse also needs a Social Security number. This excludes children with even one undocumented parent, those living with a grandparent on a small retirement income who doesn't need to file taxes, or children raised by relatives or family friends who are neither legal guardians nor adoptive parents and can't claim them as dependents. In short, it makes many children in the most vulnerable social and economic situations ineligible. A Latina mom, who asked to stay anonymous for privacy, said, 'Why are they hurting kids who have done nothing wrong? Why is it the kids' fault if parents are undocumented? Maybe the kid they won't help could have cured cancer.' A $1,000 initial deposit is a good start. However, to truly set a child on a path toward financial success, the Trump Account would need to grow significantly more than what a single $1,000 deposit can generate. Over 18 years, according to basic compound interest principles, the amount produced by the initial deposit is likely to be less than $5,000 before taxes are applied. The Tax Law Center at New York University's College of Law notes that '{T}he benefits offered by these accounts are modest.' Given the economic conditions of many Latino families, their children are likely to receive significantly less money than what is needed to start their journey toward prosperity. A Latino parent, who did not provide their name for privacy reasons, asked, 'Why not give more to people who need it? Why give it to people who do not need it? This is the government pretending to help working people, but they don't really help us.' Options For Growing A Trump Account Are Out Of Reach For Many Latinos U.S. Gold Coins Once a Trump Account is opened, families can deposit up to $5,000 annually, adjusted for inflation, until the child reaches the age of 18. Investing $5,000 each year at a 7% annual return will grow the value of the Trump Account to $173,375 by the time the child turns 18. That is a significant amount—enough to cover many college expenses, make a sizable down payment on a first home, or fund an entrepreneurial venture, all of which qualify as allowable expenses. This means that to give children the best chance at reaching economic prosperity, a family would need to deposit about $416 each month into each of their children's accounts for 18 years. However, according to the U.S. Census Bureau's latest American Community Survey, the median household income for a Latino family is $69,869, which is roughly $5,740 per month before taxes, making such a yearly deposit likely unaffordable. As a result, many Latinos who need this support to increase the likelihood that their children will achieve economic prosperity probably won't benefit from the Trump Accounts. A Latino parent who wished to remain anonymous to protect their privacy added, 'Everyone who benefits is the people with money. The $1,000 is no good unless you can add more to it. I can barely pay my bills. I have no retirement, I want more for my kids, but how can I put away money for their education when I have to pay rent?' Another factor to consider regarding the usefulness of Trump Accounts in helping young Latinos, in particular, achieve economic prosperity is the tax liability associated with these accounts. Few would refuse $1,000 to open a savings account for their child. Nonetheless, because withdrawals from a Trump Account are limited and taxed at federal, state, and local levels, it's essential to recognize that, in addition to regular contributions, there must be ways to offset the tax burden to maximize the benefit of such an initial cash infusion. The non-partisan Urban Institute notes, 'parents with lower incomes would be better off using traditional investment vehicles to save for their child's future.' Any contributions to the Trump Accounts are made with after-tax dollars. Meanwhile, withdrawals from the Trump Account for approved expenses, such as costs related to first-time homeownership or higher education, are taxed at a long-term capital gains rate. In other words, the amount of money people believe is in the account—whether the total is based solely on the initial $1,000 deposit or on additional contributions—will be less than the actual balance. Additionally, these withdrawals could be subject to state and local taxes. There is a further complication. It is associated with investment requirements, including the requirement that all funds in a Trump Account must be invested in a high-risk portfolio of corporate equities, making safe, short-term investment strategies impossible. The knowledge about investments and taxes that parents need to understand to navigate the complexities of investments generally, and Trump Accounts specifically, puts Latino children at a significant disadvantage. Access to knowledgeable and trusted financial advisers—often necessary for making informed decisions—requires substantial financial resources and expertise. Among racial and ethnic groups, Latinos have the lowest rates of college completion and per capita income, both of which hinder their ability to access sound financial advice that would help them evaluate options and choose the best course of action for their children. A Latina mother of three, who chose to remain anonymous to protect her privacy, said, 'Investing is hard and it's complicated. Why not set up something local that we can trust, will teach us how to invest, and really help our kids?' She added, 'When I heard it was taxed, I knew it would not help us. The promise of helping kids whose parents work hard but don't make a lot of money is not a real promise.' The Trump Accounts And The Latino Wealth Gap The Latino wealth gap is significant and persistent. A young Latina mother, who did not give her name to protect her privacy, said, 'We all want what everybody wants, a chance for our kids to do better. Why won't people in charge help us give our kids what their kids have?' She went on to say, 'I don't want nothing for free. I just want a chance for my kids to live well and be good to others.' The Trump Accounts are unlikely to significantly reduce the Latino wealth gap. In 2010, economists Darrick Hamilton and William Darity Jr. proposed Baby Bonds as a policy to address the racial wealth divide. However, the high initial costs and the difficulty of deciding who qualifies for the Bonds and how much to provide have made it politically challenging. The Trump Accounts are a scaled-down version of Baby Bonds. Options For The Trump Accounts To Help Latinos Suppose the Trump administration, along with congressional and state officials, academics, business leaders, and community leaders, work together with a shared commitment to significantly greater economic equity than we currently have. In that case, there is an opportunity to develop and implement policies that could help place children, regardless of their parents' economic situation, on a path to economic prosperity. This can be achieved in various ways, including combining two strategies for economic success. First, establish programs and policies, such as Baby Bonds, that make substantial public investments in children, significantly increasing the chances that children from families and communities with limited economic opportunities can be securely positioned on a path toward economic success. The second is to make access to higher education, homeownership, or starting a business more accessible and affordable for those who have historically faced, and continue to face, barriers to equitable access and potential economic success.
