‘Trump Accounts’ Could Be Better. Here’s How.

What Are Trump Accounts?

Trump Accounts are a part of the GOP’s “One, Big, Beautiful Bill” 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 reaching age 18. Children born in 2025 through 2028 (as US citizens with Social Security numbers for both parents and the child) will be automatically enrolled and receive a one-time deposit of $1,000 from the federal government into their account.

The account grows 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.
-deferred until account owners make withdrawals. If account owners make withdrawals for a qualified expenditure (college tuition, small business loan/expense, first-time home purchase), the withdrawal, net of contributions, faces the long-term capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. These taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment.
rate. Otherwise, withdrawals net of contributions face the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
rate plus an additional 10 percent penalty.

Withdrawals are allowed from half of the account once the account owner turns 18 and from the full account once the account owner turns 25. When the account owner turns 31 the remaining balance is treated as withdrawn and taxed accordingly.

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 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.

In 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 by increasing contribution limits and adding more types of qualified expenditures.

Contributions to Trump Accounts would not be deductible, and qualifying withdrawals would be eligible for the reduced long-term capital gains tax rate. Accordingly, Trump Accounts would provide less generous treatment than either a traditional or a Roth account. Trump Accounts would also provide less generous treatment than a 529 savings plan, which provides a full exemption for withdrawals used for qualifying expenses. However, by offering tax deferral, Trump Accounts would have a tax advantage over a generic brokerage account.

Only three expenditures would qualify for the long-term capital gains tax rate: college tuition or credentialing expenses, small business expenditures, and first-time home purchases. If a Trump Account owner used the money for any other reason, a higher tax rate would apply.

Proponents of Trump Accounts say they will promote saving and long-term wealth. However, the account owners would need to withdraw the full balance of the account by age 31 to avoid the money being taxed as income. This requirement is counterintuitive to encouraging truly long-term saving and wealth building.

Trump Accounts Are Most Similar to HSAs

What Can Be Done?

Adding another boutique savings account to the pile is a step towards complexity, not opportunity.

If the federal government really wanted to make saving more accessible for taxpayers, it would swap the proposal for Trump Accounts to replace the complicated mess of savings accounts currently available with universal savings accounts.

Universal savings accounts would simplify saving into one 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 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 account tend to exceed their income, which points to strong financial security.

Universal savings accounts should be implemented for the sake of taxpayers instead of another overly complicated, restrictive, and limited savings vehicle like Trump Accounts.