What Are Trump Accounts?
Trump Accounts are a part of the recently passed One Big Beautiful Bill Act (OBBBA) aiming to encourage saving for a child’s future by allowing parents and others to contribute up to a combined $5,000 yearly for the child to use after attaining age 18, adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. starting in 2027. Employers can only contribute up to $2,500, adjusted for inflation starting in 2027, which counts against the $5,000 total. The $2,500 does not count for the gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income. For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods, including inventory and certain labor costs. of the employee, so it is not subject to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. at either the employer or employee level (similar treatment is given to other fringe benefits). Contributions made by parents or beneficiaries are not tax-exempt. Contributions by states, tax-exempt 501(c)(3) organizations, or the Secretary of Treasury are not subject to the $5,000 limit but are required to be made to one of three qualified classes of beneficiaries—either every beneficiary, beneficiaries who live in one or more states or qualified geographic area specified by the contribution, or beneficiaries born in a certain year. Children born in 2025 through 2028 (born as US citizens with Social Security numbers) will be automatically enrolled and receive a one-time deposit of $1,000 from the federal government into their account. This one-time deposit must be claimed through a bank or other qualified financial institution.
The money in the account must be invested in a qualified mutual fund. Qualified mutual funds must follow either the S&P 500 stock market index or another index comprised of equity investments in primarily US companies, and for which regulated futures contracts are traded on a qualified board or exchange. Such a fund cannot include an industry- or sector-specific index, but it may include an index based on market capitalization. The mutual fund also cannot have annual fees or expenses more than 0.1 percent of the balance of the investment in the fund.
The account grows tax-deferred until account owners make withdrawals, which can only start at age 18, and the account at that point essentially follows the rules in place for individual retirement accounts (IRAs). As such, withdrawals, net of after-tax contributions, made before age 59 ½ are subject to regular income tax and a 10 percent penalty, with many exceptions, including for college tuition (unlimited) and for a first-time home purchase (up to $10,000).
What Is Wrong with Trump Accounts?
Trump Accounts add another layer to an already overcomplicated savings account system in the United States. The tax code provides for at least 11 different tax-advantaged savings vehicles, each with different rules, limitations, and regulations. The addition of the Trump Accounts would further complicate savings for taxpayers who would have to keep track of yet another account. Additionally, the Treasury Department and IRS, which are already bogged down with administering the existing plethora of savings accounts, would be forced to administer yet another account.
Under an income tax neutral between saving and consumption, income used for saving is only taxed once: either when it is first deposited, or when it is withdrawn. Roth-style accounts tax income when it’s deposited, but exempt withdrawals once taxpayers reach retirement age. Traditional IRAs and 401(k)s allow deductions for contributions but tax withdrawals at ordinary income tax rates.
Some existing savings accounts have double exemptions. Health savings accounts, or HSAs, allow deductions for contributions and do not tax withdrawals. Because of the double tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. , HSAs are more generous to saving than a neutral system would be. It’s worth noting that the reconciliation bill expands HSAs associated with certain types of health insurance plans.
Trump Accounts are structured similarly to Roth IRAs but with additional restrictions, including inability to access funds until age 18. For parents looking to set up an account for their children’s education, a 529 account offers more flexibility and tax benefits (the bill also expands eligible education expenses for 529 accounts). As such, Trump Accounts do not offer much of an additional incentive to save; rather, the main benefit is in the form of the $1,000 initial deposit from the federal government and whatever employers choose to contribute (perhaps Trump Accounts might encourage young beneficiaries to engage in more money management than the otherwise would if not saving per se).
Trump Accounts Are Structured Similarly to Roth IRAs But with Additional Restrictions
| Savings Vehicle | Tax on Deposits? | Tax on Withdrawals? | Eligible Expenses | Conditions on Withdrawals |
|---|---|---|---|---|
| Traditional IRA/401(k) | No | Yes | All | Withdrawals made after age 59 1/2, with limited exceptions allowing earlier penalty-free withdrawal |
| Roth IRA/401(k) | Yes | No | All | Withdrawals made after age 59 1/2, with limited exceptions allowing earlier penalty-free withdrawal |
| 529 Tuition Plan | Yes | No | Qualifying Educational Expenses | Must be qualifying educational expenses |
| Health Savings Accounts (HSAs) | No | No | Qualifying Health Expenses | Must be qualifying health expenses |
| Trump Accounts | Yes | Yes, with many exemptions | All qualified IRA expenses | Withdrawals made after age 18, with tax preference for expenditures that fall under IRA early withdrawal exceptions and withdrawals after age 59 1/2 |
| Universal Savings Accounts (Traditional) | No | Yes | All | None |
| Universal Savings Accounts (Roth) | Yes | No | All | None |
What Can Be Done?
Adding another boutique savings account to the pile is a step toward complexity, not opportunity.
If the federal government really wanted to make saving more accessible for taxpayers, it would replace the complicated mess of savings accounts currently available with universal savings accounts.
Universal savings accounts would simplify saving into a single tax-neutral account for taxpayers. Doing so would simplify saving for taxpayers and remove much of the current burden of rulemaking and administration from the Treasury and IRS.
Other countries that have implemented universal savings accounts have done so with remarkable success. In both Canada and the United Kingdom, more than half the adult population uses a universal savings account and keeps more money in it than other retirement accounts. For low-income earners, balances in their savings accounts tend to exceed their income, which points to strong financial security.
It will be interesting to see how Trump Accounts play out, for instance, to see the degree to which employers choose to contribute to them. However, our speculation is that these accounts will be underutilized as savings vehicles. There remains a need to fundamentally reform the tax code to encourage saving broadly in a simple way and improve financial security via universal savings accounts.
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