In an early-morning session Thursday, the House of Representatives passed President Donald Trump’s landmark tax reform package, which includes the creation of special savings accounts for children that will receive an initial $1,000 federal contribution.
Dubbed “Trump Accounts,” these savings vehicles were previously introduced under the name “Money Accounts for Growth and Advancement” — also referred to as “MAGA Accounts.” The funds in these accounts can later be used toward educational pursuits, purchasing a first home, or starting a small business.
While the House has now given the green light to the legislation, it still awaits potential amendments or resistance in the Senate before becoming law.
Under the plan, families will be allowed to contribute up to $5,000 annually per account. Contributions will be invested in a portfolio that mirrors the performance of a major U.S. stock market index.
Senator Ted Cruz of Texas, a leading advocate for the policy, emphasized its long-term benefits. “The miracle of the compound growth, the ability to accumulate wealth, which is transformational,” he said, explaining the power of the accounts to provide financial opportunity from a young age.
The Trump Account shares similarities with the existing 529 college savings plan, offering tax-deferred growth and a favorable capital gains tax rate on qualifying withdrawals.
Sam Taube, lead investing writer at NerdWallet, explained that the taxation structure is comparable to other investment tools. “This isn’t all that different from the tax treatment you would get from a typical brokerage account,” he said.
There are already savings tools available for children, such as UTMA and UGMA custodial brokerage accounts, which allow families to gift financial assets to minors. However, those accounts may subject investment income to the “kiddie tax,” which applies the parents’ tax rate to the child’s earnings.
Unlike those custodial accounts, 529 plans offer tax-free withdrawals when the funds are used for educational purposes like tuition, housing, and books, making them especially attractive for families focused on college costs.
Chris McGee, chair of the College Savings Foundation, highlighted the advantages of sticking with established options. “We continue to believe that 529 plans provide tremendous benefits as a tax-advantaged savings vehicle for American families, with a proven nearly 30-year track record,” he said.
Though Trump Accounts can be used more broadly than 529s, recent changes to 529 rules have expanded their utility as well — now covering apprenticeship programs, certain continuing education classes, and even student loan payments.
Another key distinction lies in contribution limits. For 2024, a single donor can gift up to $19,000 — or $38,000 for a married couple — into a 529 plan per child without affecting lifetime gift tax exemptions.
Financial advisor Winnie Sun believes the 529 plan remains the superior option for college-bound children. “For most parents, like myself with teens, the 529 college savings plan is superior if you’re focused on paying for higher education because of the federal tax-free growth,” she said.
Sun also praised a new rule allowing families to roll over unused 529 funds into a Roth IRA, an option that took effect in 2024. “Also, now, the 529 is becoming more flexible with its’ ability to have unused funds rolled into a Roth IRA in the future for retirement,” she said.
One of the most compelling features of the Trump Account is the one-time $1,000 contribution for every U.S. child born between January 1, 2025, and January 1, 2029. These funds will be distributed by the Treasury Department and are available to all citizens whose parents both hold Social Security numbers.
While a few states such as Connecticut and Colorado have introduced their own “baby bonds” initiatives, the Trump Account, along with the proposed expansion of the child tax credit, “could certainly help a lot of families at a lot of different income levels,” said Taube of NerdWallet.
He also noted that these accounts don’t conflict with other tax-advantaged savings tools like 529 plans. “So parents could take advantage of both,” he added.
Still, for families looking to save for college specifically, Sun advised that a more traditional approach might be best. “My recommendation would be, if you’re focused on college savings, talk to an advisor and start with the 529 plan first,” she said.
{Matzav.com}