The Trump Account

This post is a public interest essay and not the normal comedic posting.  For some unusual reason the topic of the $1,000 gift to newborns established by the Federal government in the One Big Beautiful Bill Act came up at a casual dinner meeting with friends.  We all decided that we did not really know how it worked.  I offered to do some research and report back to the group.

We were all surprised at the significant benefits that may be available for newborns who qualify for the coverage.  The elements of the legislation are a little complex and convoluted.  In fact, not all of the mechanics for administering the program have been finalized.  However, it appears that the 530A Account (aka Trump Account) may have some very positive benefits.

The following document is a direct response to my dinner partners.  It occurred to me that  others might benefit from a better understanding of the law’s provisions so I am adding the document to the blog as kind of a public service announcement.  There is a lot of detail because that is the nature of governmental legislation.  However, hang in there because this can be a really terrific benefit for children who qualify for the Trump Account.         

Okay, after last night’s discussion, I did some research on the newborn savings account that is called the Trump Account or the 530A account.  The account was established by the One Big Beautiful Bill Act but the terms and provisions are not carved in stone.  I had to go to several different sites to get all of the elements of the legislation.  Most only addressed part of the provisions and were slanted according to the interest of the authors.  For example, the articles provided by investment companies were mostly suggesting that they had better ideas for better funding of your child’s future.  Most of the articles written by mainstream media loved the accounts if they were conservative outlets or saw a lot of flaws and pitfalls if they were liberal outlets.  The most complete and unbiased information came from Wikipedia.

The bottom line is that the worst case scenario will be that anyone who simply accepts the federal government funding will put their child in a position to accumulate approximately $15,000 of free money when they turn 18.

Let’s go through each provision in the context of our discussion. This is a little complex but I am trying to explain it as simply as possible. 

Who is eligible for the program?

Every child who is born between 12/31 2024 and 12/31/2028, who is an American citizen, and who has established a Social Security number, can set up an account.  The federal government will provide $1,000 of initial funding.   

In addition, private philanthropists and state governments are allowed to establish funding for other children outside of birth range for the basic plan.  If approved, such funding will also be included in the Trump Account or 530 A.  For example, Michael and Susan Dell have donated $250 of funding for every child born from 1/1/2014 through to 12/31/2024, who live in zip codes where the median family income is less than $150,000. None of these children would be eligible to receive the $1,000 benefit offered by the Big Beautiful Bill legislation. Those who accept the Dell Funding offer, will be offered the same tax provisions as Trump’s 530A.   

How do you enroll?

Parents can request a form from the IRS that will enroll their qualifying child.

In addition, the IRS will automatically enroll all qualified children who are claimed as dependents on their parent’s tax return.  To be claimed as a dependent, you must have a Social Security number. The IRS will use that data to automatically enroll these children and provide the initial $1,000 funding.

This supports Steve’s contention that a lot of low income children will miss out on the benefit.  Many low income individuals will not file tax returns and some of those who do may not claim their children as dependents and obtain the required Social Security number for them.

Can there be additional funding beyond the initial $1,000 contribution from the Federal Government?

Yes, and the funding does not have to come from the parents. 

Parents and friends can donate up to $5,000 per year to their child’s Trump Account.  These contributions are not deductible to the parents but they accumulate tax free in the 530A (Trump) Savings Account.

In addition to the $5,000 available to parents and friends, corporations can include a contribution of up to $2,500 per year to the children of their employees as a fringe benefit.  Some employers are committed to making a wholesale contribution and others are structuring the donation as “matching” benefit to their employees.  e.g. If the employee provides up to $2,500 per year, the company will kick in a matching amount up to $2,500. The employer’s contribution in any form is a tax deductible event for the corporation.  The employer contribution limit is $2,500 per employee not $2,500 per child.

States can elect to contribute to the accounts for children in their respective states.  As best as I can determine, the state contributions can be in addition to the parents and friends contributions and the employees contributions.  Very likely, the state funding would be a one time initial contribution similar to the Federal donation.

As noted above, philanthropists can contribute additional funding in a wide variety of formats.

Hypothetically, if a state agrees to contribute $1,000, the initial contribution could be substantial for some children.  In a particular year, the account could have contributions of $5,000 from the parents, $2,500 from the employer and $1,000 from the state aggregating a whopping $8,500 in that particular year. The parent only moved $5,000 into the account.  The additional $3,500 comes from others outside the family.

In addition, the philanthropic contributions can be piled on to make the annual contribution even bigger.

Again, this reinforces Steve’s argument.  Clearly, this can have very significant benefits to anyone who can afford to contribute but it may not really be an option for someone who lives paycheck to paycheck.

Who controls the investments in the Trump Accounts?

The Trump Accounts are an unusual form of investment.  Funding starts shortly after birth but the recipients cannot touch the accumulation for at least eighteen years.  When the law was passed, the legislatures wanted to strongly emphasize investment in a broad spectrum of US companies.  The investments would primarily be low cost mutual funds and ETF’s that would approximate the return of the Standard and Poors Index. This is an excellent investment strategy because over long periods of time, no one can top the return of the S&P 500.  There will be very few approved options for investing.

The government is not managing the funds for the Trump Account investors, however, to achieve their goals, the Feds will only allow investment in a few, carefully selected, mutual funds.  The servicing fees must be nearly nothing (no greater than .1%).  The basis for the mutual fund’s (ETF’s) investments must be equities in US companies.  In essence, most of the investments will be in S&P 500 stock funds.  There will be very few choices and they all will look a lot like the S&P 500 ETF. 

This may serve as another impediment to the very low income or indigent families. It appears that you may have to select an investment firm to manage your child’s Trump Account and you may have to make some investment decisions. It is possible that there is a default.  For example, if you open an account and do not designate someone to manage it or select investments from the limited menu, the government may assign a particular investment management option to your account.  This is conjecture on my part.  I could not find any references to what will happen if someone is enrolled in a Trump Account and does not select an investment manager.               

When can you take money out of the Trump Accounts?

No withdrawals can be made from the Trump, 530A Account until the account holder reaches 18 years of age.  When the child turns 18, the Trump Account assumes a lot of the characteristics of an IRA.  In general, if the Account Holder withdraws money from age 18 to age 59½ , it will be taxable income to him or her and it will incur a 10% early withdrawal penalty.  It appears that the penalty will be waived if the withdrawal is used to purchase a house (up to a $10,000 limit), or pay for higher education expenses, medical expenses, and health insurance.  Disbursements for death or disability are not subject to the 10% penalty. These rules are still being solidified, however.          

How much is a child likely to accumulate?   

There are a lot of variables, however, using the historical performance of the S&P 500, financial professionals estimate that someone who takes the government’s initial $1,000 and does not receive any additional funding will accumulate approximately $15,000 by their 18^th birthday.  Someone who takes the initial $1,000 and secures contributions of $5,000 per year for 18 years will accumulate more than $700,000 by their 27^th birthday.  For many, it may clearly be possible to pile up more than $5,000 a year and it does not all need to be funded by parents. 

So there is the possibility of accumulating meaningful wealth.  Certainly a number of factors impact long term investing.  For many years we were popping along at 2% or less inflation levels.  $700,000, 27 years down the road, could be a nice number.  Today, the inflation rate for the month of January, was an annualized 6%.  Over 27 years, that will put a big dent in the buying power of $700,000.  Realistically, those who will be able to maximize funding of the Trump Account will accumulate $1 million dollars in their retirement accounts by the time they are 30. 

What is the investment community saying?

The financial advisors like the idea of grabbing all of the free money you can for your children but they don’t recommend putting your own money into the 530A accounts.  They say “Open the account.  Take the Fed’s $1,000 and any money the State may add.  Maximize the recurring contributions from your employer.  If it is a “matching” program, this may require some contribution on your part.  However, a 50/50 match will generate a 100% return on your investment right out of the blocks every year”.     

What the financial people do not like is the limitation on the types of investments offered by the plans and the restrictions on accessing the funds in the long run (you have to adhere to the IRA rules or pay 10% distribution penalties).

Summary

Sinelli disagrees with the financial people.  First, they are always telling you that they can beat the return of the S&P 500, but I have never found a financial advisor who has done it over a ten year period of time.  More importantly, the people who can gain the most from the program, middle income and lower income people, are not normally going to use financial advisors.  In truth, the advisors don’t want those clients either.  They do not offer sufficient income potential to the advisor to justify the effort required.

So, middle income people, who work for employers that have reasonable benefit programs, can truly put their children on the path to building a robustly funded retirement program.  Most importantly, it is very easy to do and it is relatively inexpensive.  I have harped on retirement funding to many of my friends for more than 40 years.  Most of them did nothing to address the need.  In order to make contributions to your IRA, you need to have earned income.  There are not a lot of infants that have earned income.  If you sign up your progeny in one of these “set it and forget it plans”, they may well have won the retirement funding battle by the time they are 25 with virtually no financial strain on their part.  What an incredible financial jump start in life. 

The narrow structure that the financial advisors dislike is one of the best features of the plan. You do not have to be a financial guru to start moving forward.  In essence, the absolute ease in setting up and administering the plan, the beauty of compounding tax free returns starting out at age 0, and the seamless transition from a Trump Account to IRA rules and regulations make this a home run for lower and middle income Americans. 

If you want your kids to have a better life, sign them up!  Maximize the contributions from others and kick in what you can.  At age 59 ½ they will have a much better life.   

Although these benefits are extremely well directed to middle and lower income families, they may not be well directed to the indigent.  Steve’s concern that people who are not traditional employees, will have a hard time taking advantage of these benefits is accurate.  Perhaps that is a separate problem.  The indigent and unemployed or marginally employed could certainly benefit from Trump Accounts.  They could take advantage of all of the free funding.  The problem is not the plan.  The problem is how do you enable them to take advantage of it.