What's Better? The MAGA Account Vs. The Child IRA?
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The MAGA Account could simply be a case of overcomplicating a straightforward solution.
The news hit this week with a flurry of articles. The House and Senate are considering what is being called a 'MAGA Account,' short for the 'Money Account for Growth and Advancement.' The proposal has taxpayers funding $1,000 to every baby born in the years 2025 through 2028. In addition, it would allow parents, family, or friends to add contributions up to $5,000 per year until the child turns eight.
If this sounds familiar, it's because it is. The concept of government-subsidized 'baby bonds' was first proposed decades ago. While never gaining traction at the federal level, several states, including the District of Columbia, have adopted programs that provide government-funded accounts for newborn babies. Unlike the MAGA Account, however, these state-run programs are generally available only to families with incomes below certain thresholds.
The MAGA Account also echoes the Child IRA as featured in two recent books. These vehicles, when used strategically, allow children to retire as multi-millionaires. The only catch is the child has to work—not so easy for babies, but very possible for teenagers. These are just like regular IRAs—both traditional pre-tax and after-tax Roth IRAs—but for minor children.
While the full House and Senate have yet to vote, you can still compare the MAGA Account with the Child IRA to see which might be better for your child or grandchild.
Unlike IRAs and 529 plans, the MAGA Account has taxpayers funding $1,000 for every child. There's a caveat here. It's considered a pilot program, so it applies only to children born between 2025 and 2028. Children would not be able to access their funds until their 18th birthday and must distribute the entire account by their 31st birthday. Assuming an 8% annual rate of return, the initial $1,000 would grow to approximately $5,000 by age 18 and to just under $11,000 by age 31. All distributions of earnings would be taxed as ordinary income.
That doesn't sound like it would make much of a dent in things.
That's why the next aspect of the MAGA Account is critical. Each account can receive $5,000 per year (from virtually any source) until age 8. That's potentially another $40,000 added to the account. Applying the same growth assumptions above, these fully charged MAGA Accounts would grow to about $128,000 by age 18 and nearly $350,000 by age 31. That's certainly enough to pay for college or buy a new home (but not both).
Missing from the current discussion is what happens if the MAGA Account is used for retirement? If it could be left untouched and earn 8% per year until age 70, the fund would grow to more than $7 million.
Keep in mind that the nominal average long-term market return is 10.5%. If you recalculate the returns based on this number, and assuming you could let the account accumulate, you'd have $181,000 at age 18, $662,000 at age 31, and more than $32 million at age 70.
Of course, this analysis assumes the legislation passes as is currently proposed.
As detailed in the books From Cradle to Retirement: The Child IRA and The Parent's Guide to Turning Your Teen Into a Millionaire, the Child IRA is immediately available to all, as long as the child has earned income. (Yes, it is possible for newborn babies to earn income.) Ideally, these IRAs would be established as ROTH IRAs so they can both grow and be distributed tax-free.
Setting aside the various ways children could earn income, you can quickly see what the numbers look like under three different scenarios.
In the first case, the original Child IRA scenario, the child earns enough income from newborn through age 18 to contribute $1,000 a year (for a total contribution of $19,000). By age 70, this grows to $2.3 million (an 8% annual return) or $9.7 million (a 10.5% annual return).
The second scenario represents the easiest and most likely Child IRA opportunity. In this case, the child begins work as a teenager (age 13) and earns enough every year (through age 18) to contribute the maximum amount possible ($7,000). Lest you think this is too ambitious, remember that it represents total earnings, not just the earnings of a single job. Thanks to the internet, creative teenagers can run multiple side hustles, thus creating several sources of income. By age 70, the total contribution of $42,000 would grow to $2.8 million (assuming an 8% annual return) or $9.8 million (assuming a 10.5% annual return).
Finally, if you consider the most ambitious scenario, you'll see the real power of compounding. Assume the child contributes the maximum through age 18. That's a total of $133,000 in contributions. At age 70, this grows to $15.9 million (with an 8% annual return) or $67.9 million (with a 10.5% annual return). For comparison sake with the MAGA Account, at age 18, this Child IRA would be worth $290,000 (8%) or $378,000 (10.5%). At age 31, this Child IRA would be worth $790,000 (8%) or $1.4 million (10.5%).
Why Ben Franklin?
'Ben, the favorite Founding Father and First American, taught us about truly long-term investing with his 200-year gifts to the cities of Boston and Philadelphia for funding skill development of generations to come,' says J. M. (Jack) Towarnicky, Of Counsel for Koehler Fitzgerald, LLC in Powell, Ohio.
Towarnicky believes Washington has 'again missed the boat on how to prompt long-term savings.' He points out, 'Like past Democratic proposals such as Baby Bonds and 401kids, MAGA adds to our $1 to $2 trillion annual deficits and our $36+ trillion in national debt. Young Americans don't need additions to debts they must someday pay!'
It turns out, according to Towarnicky, there's a simple, well-worn path for achieving the objective of the MAGA Account without increasing the national debt.
'There is a better option,' he says. 'I call it the Ben Franklin Child Roth IRA. It isn't complicated. Just apply the Spousal IRA rules, which have been in the tax code since 1977, so that they apply to minor, dependent children under the age of 18, but limit those rules to a Roth IRA. Anyone can contribute—a parent, grandparent, sibling, or friend. You don't have to be a relative. Even a non-governmental agency (NGO) or the federal, state, or local government could contribute!'
Mimicking the Spousal IRA would appear to be a seamless way to create a Child IRA without strings attached. 'It has been part of the tax code for over 45 years for a spouse without wages,' says Towarnicky. 'Most minor dependent children don't have wages either.'
The real selling point of his idea, which deficit hawks will find most attractive, is his limitation of using only the Roth IRA. He says, 'Why Roth? No impact on federal deficit or national debt, because favorable tax treatment on investment earnings doesn't apply until the owner reaches age 59½. In addition, it favors low- and middle-income households.'
Are you interested in learning more about the Child IRA? Go to ChildIRA.com for the latest news, information, and resources on the subject. Including the latest information on the MAGA Account should it become law.
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