Tax bill includes $1,000 baby bonus in 'Trump Accounts' — here's who is eligible

CNBC

22-05-2025

In a vote early Thursday, House members approved President Donald Trump's "big, beautiful" tax bill, including a new savings account for children with a one-time deposit of $1,000 from the federal government.
Under the proposal, "Trump Accounts" — previously known as "Money Accounts for Growth and Advancement" or "MAGA Accounts" — can later be used for education expenses or credentials, the down payment on a first home or as capital to start a small business.
The final version of the bill that House Republicans passed Thursday could still face pushback in the Senate.
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If the bill passes as drafted, parents will be able to contribute up to $5,000 a year and the balance will be invested in a diversified fund that tracks a U.S.-stock index.
Sen. Ted Cruz, R-Texas, who spearheaded the effort, said the accounts give children "the miracle of the compound growth, the ability to accumulate wealth, which is transformational."
Not unlike a 529 college savings plan, the Trump Account has a tax incentive to getting a jump start on saving. Earnings grow tax-deferred, and qualified withdrawals are taxed at the long-term capital-gains rate.
"This isn't all that different from the tax treatment you would get from a typical brokerage account," said Sam Taube, NerdWallet's lead investing writer.
Other similar options already exist. Custodial brokerage accounts — often called a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gift to Minors Act) account — also allow parents to transfer bank deposits, stocks, bonds and mutual funds to minors. But in that case, investment income, including dividends and interest, could be subject to a "kiddie tax" charged to the parents at their rate.
With 529 accounts, alternatively, earnings grow on a tax-advantaged basis, and when a child withdraws the money, it is tax-free if the funds are used for qualified education expenses, such as tuition, fees, books, and room and board.
"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," said Chris McGee, chair of the College Savings Foundation, a nonprofit that provides public policy support for 529 plans.
Although there are more limitations on what 529 funds can be applied to compared to Trump Accounts, restrictions have loosened in recent years to include continuing education classes, apprenticeship programs and student loan payments.
Plus, 529 accounts have much higher contribution limits. This year, individuals can gift up to $19,000, or up to $38,000 if you're married and file taxes jointly, per child.
"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," said Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, based in Irvine, California.
"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," said Sun, a member of CNBC's Financial Advisor Council.
As of 2024, families can roll over unused 529 funds to the account beneficiary's Roth individual retirement account, without triggering income taxes or penalties, so long as they meet certain requirements.
Experts say the biggest benefit of Trump Accounts is the seed money for all children born between Jan. 1, 2025, and Jan. 1, 2029, funded by the Department of the Treasury. There are no income requirements and everyone is eligible, as long as the child is a U.S. citizen, and both parents have Social Security numbers.
Although some states, including Connecticut and Colorado, already offer a type of "baby bonds" program for parents, the Trump Accounts — along with a bigger child tax credit proposed in the budget bill — "could certainly help a lot of families at a lot of different income levels," said NerdWallet's Taube.
Further, these accounts are not mutually exclusive from other tax-advantaged accounts, like 529 plans, he added, "so parents could take advantage of both."
Still, for parents weighing their options for early investment vehicles, "my recommendation would be, if you're focused on college savings, talk to an advisor and start with the 529 plan first," Sun said.