One of the particularly interesting ideas (in my opinion) from the One Big Beautiful Bill Act was the creation of Trump Accounts for children under the age of 18.
For children born before between Jan. 1, 2025, and Dec. 31, 2028, the Dept. of the Treasury will “contribute” $1,000 per individual. One caveat here; A BIG CAVEAT, is that the money will come via a tax credit. So, you must be paying taxes in order to be able to put that money into the child’s account.
40% of tax filers (about 75 million) have NO Federal tax liability. That eliminates that section of the population right off the top. 75 million families will not be able to take advantage of this program.
But there is no income restriction with this deposit, so, anyone paying taxes gets another $1,000 tax “rebate” by allowing that money to be put into their child’s account rather than the Treasury’s pocket.
(Michael Dell has donated over $6 Billion to fund $250 into the accounts of children who live in Zip codes where the median household incomes are below $150k per year and applies to children who are older than those that qualify for a Trump Account.)
None of the money in these accounts can be removed before the child becomes 18.
The funds must be invested in low-risk stock market index funds, although that may well change as new Congresses tweak the rules.
Let’s look at the plusses and minuses of these programs.
On the plus side is that children will have at least some form of financial support outside of their parent’s largesse.
Also, the fact that ALL children will have an investment account means that schools can offer lessons in financial management that will have a direct effect on the students. They can teach about the stock market, investments, and compounding.
These accounts will allow for additional contributions from the individual, the parents, or employers, amplifying the value of those accounts.
On the not-so-much positive side, these accounts “can be rolled into” investment accounts. When that is done, there is exposure to broker fees and management charges, reducing growth.
Also, as money is deposited into the accounts they become tied up until the child turns 18 without tax and penalty assessments, so, the money that would normally have been available to purchase a car, a gown for the HS Prom, a vacation, or personal possessions is no longer accessible.
And since contributions to these accounts are tax deductible, they will offer additional tax benefits to the wealthy who can avoid income taxes by depositing funds into their children’s accounts. This could be used as an alternative to 529 education accounts for which the deposits are made after taxes.
Would the $1,000 deposit be worth a lot after 18 years?
Well…not so much.
Let’s look at how that grows.
I will not assess ANY costs for stock purchases, trades, or investor fees although with billions of dollars suddenly available, there will be good advisors, so-so advisors, and scam advisors trying to access those funds.
Nevertheless, how will that money grow.
If you took $1,000 and invested it at an annual return of 7.7% (the average return of the S&P 500 over the past 20 years), for 18 years how much would that $1,000 mature into (including compounding)?
$3,801
Now the average inflation rate over the past 20 years was 2.9%
So, what would $1,000 be equal to in 18 years?
$1,673
So, the growth of that $1,000 over 18 years would actually be:
3801 – 1673 – 1000 =
$1,128
That’s a nice return of 113%, but it doesn’t really leave any nest egg or college fund.
What about the money?
In the US, about 3.6 million babies are born each year.
So, the cost for Trump Accounts would be $3.6 billion per year.
If this is money being spent for providing financial education to children, that means that this $3.6 billion is not available for spending for other education uses, as there is no tax or revenue provision to provide these funds.
(NOTE: these accounts are funded by general tax revenue from all taxpayers, including single individuals, taxpayers beyond child-bearing age, and childless families, and then provided to a specific subset of people – newborn babies. This is the precise definition of a socialist program. As per Karl Marx: "from each according to his ability, to each according to his needs.")
There are about 150 million tax returns filed.
40% of those filed have NO federal tax liability (60 million)
- In 2022, taxpayers filed 153.8 million tax returns, reported earning nearly $14.8 trillion in adjusted gross income(AGI), and paid $2.1 trillion in individual income taxes.
- The average income tax rate in 2022 was 14.5 percent. The top 1 percent of taxpayers paid a 23.1 percent average rate, six times higher than the 3.7 percent average rate paid by the bottom half of taxpayers.
- The top 1 percent’s income share fell from 26.3 percent in 2021 to 22.4 percent in 2022, and its share of federal income taxes paid fell from 45.8 percent to 40.4 percent.
- The top 50 percent of all taxpayers paid 97 percent of all federal individual income taxes, while the bottom 50 percent paid the remaining 3 percent.