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CNBC
5 days ago
- Business
- CNBC
'Trump accounts' come with a $1,000 baby bonus. Then the rules get complicated, tax experts say
President Donald Trump's massive tax and spending package includes a new child savings account with a one-time deposit of $1,000 from the federal government for newborns. The premise is simple: So-called "Trump accounts," a type of tax-advantaged savings account, will be available to all children who are U.S. citizens starting in July 2026. Beyond that, the rules get somewhat confusing, tax experts say. Under Trump's "big beautiful bill," children born in 2025 through 2028 will also receive a $1,000 deposit each in their Trump account, funded by the Department of the Treasury. There are no income requirements. Parents and others will be able to contribute up to $5,000 a year in after-tax dollars up until the year before the beneficiary turns 18. Employers could also contribute up to $2,500 to an employee's account, which wouldn't be counted as income to the recipient. Both caps will be indexed to inflation. The balance will be invested in a low-cost fund that tracks a U.S. stock index. From a tax perspective, the accounts would function like an individual retirement account. Earnings grow tax-deferred, and qualified withdrawals are generally taxed as ordinary income. Here's where it starts to get tricky. Trump account funds may not be easily accessed for decades. Money in a Trump account generally can't be withdrawn before the beneficiary turns 18. After that, "it turns into a traditional IRA," said Ben Henry-Moreland, a certified financial planner with advisor platform Because the final version adheres to IRA rules, savers would pay a 10% tax penalty on withdrawals before age 59½. In earlier versions of both the House and Senate bill, withdrawals could begin at age 18, at which point account holders would have been able to tap the funds for education expenses or college alternative programs, the down payment on a first home or as capital to start a small business. "The IRA distribution rules requiring owners to wait until they reach age 59½ to make penalty-free withdrawals would presumably still be in effect," according to Henry-Moreland's analysis of the legislation. More from Personal Finance:Trump's 'big beautiful bill' slashes CFPB funding78% say Trump's tariffs will make it harder to deal with debtTax changes under Trump's 'big beautiful bill' — in one chart There are ways to avoid the IRA early withdrawal penalty for those under 59½, including if the funds are used to pay for qualifying higher-education expenses or first-time home purchases, as well as for emergency expenses, among certain other exceptions. However, since Trump accounts include a mix of after-tax contributions, initial seed money and investment income, distributions are still partially taxable. That means there are fewer tax planning opportunities compared with traditional and Roth IRAs, where there's either a tax break on contributions or on withdrawals. Trump accounts have neither. "It seems like this is a good idea, complicated with unfavorable tax characteristics," said Zach Teutsch, a managing partner at Values Added Financial in Washington, D.C. For example, "in a Roth account, you don't have to pay tax on the income or the gains, and that just seems better," he said. Experts say that additional details on the tax treatment of distributions will need further clarification from the Treasury Department or Internal Revenue Service. "This is really a retirement account for children," Henry-Moreland said. "It's a way to put money in an account at a young age that gets saved but doesn't have the earned income requirement that a traditional or Roth IRA would have." But because Trump accounts are also restricted to stock funds, that means that savers won't be able to benefit from rebalancing with less risky fixed-income options, such as bonds or cash. After age 18, the "eligible investment" rules may no longer apply and the beneficiary can invest the funds in any way allowed within an IRA, according to Henry-Moreland. Republican lawmakers have said Trump accounts will introduce more Americans to wealth-building opportunities, particularly by investing in the stock market. Sen. Ted Cruz, R-Texas, who spearheaded the effort, said in a May "Squawk Box" interview that the accounts give children "the miracle of the compound growth, the ability to accumulate wealth, which is transformational." A $1,000 initial deposit boosts the attractiveness of these accounts, too. Although some states, including Connecticut and Colorado, already offer a type of "baby bonds" program for parents, most tax professionals agree that the biggest benefit of Trump accounts is the seed money for children born from Jan. 1, 2025, through Dec. 31, 2028. "There's going to be a nice big check coming into the account," said Evan Morgan, a certified public accountant and tax principal at Kaufman Rossin, in Fort Lauderdale, Florida. Just as advisors recommend deferring enough into a 401(k) plan to benefit from your employer's full 401(k) matching contribution, there is no reason to pass this up. "If the government is giving you free money, you should take it," said Teutsch. Otherwise, most experts say a 529 college savings plan is a better alternative for families because of the higher contribution limits and tax advantages. This year, individuals can gift up to $19,000 to a 529, or up to $38,000 if you're married and file taxes jointly, per child without those contributions counting toward your lifetime gift tax exemption. Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child's life and then become more conservative as college nears. By the time high school graduation is around the corner, families likely have very little invested in stocks and more in investments like bonds and cash. That can help blunt their losses. "At least in a 529 plan you have more flexibility on what to invest in," Morgan said. Although there are limitations on what 529 funds can be used for beyond higher-education costs, restrictions have loosened in recent years to include continuing education classes, apprenticeship programs and student loan payments. Withdrawals from 529s for nonqualified expenses can be subject to tax and a 10% penalty. Also, as of 2024, families can roll over unused 529 funds to the account beneficiary's Roth IRA without triggering income taxes or penalties, so long as they meet certain requirements. "If you were looking at this compared to a 529, I would almost pick a 529 every time," Henry-Moreland said. In some cases, wealthier families could benefit from fully funding a 529 plan and then putting additional funds in a Trump account, as a way to get a jump start on retirement savings without having to satisfy the earned income component of a traditional IRA or Roth, according to Teutsch. However, "most Americans don't even put one dollar into 529 plans, let alone maxing them out," he said.
Miami Herald
14-05-2025
- Business
- Miami Herald
‘MAGA accounts' may be a great way to kickstart your kids' savings
The proposed House Ways and Means tax bill introduces a new type of investment account that could change how American families save for their children's future. The legislation includes a provision to create a new tax-advantaged savings vehicle called the Money Account for Growth and Advancement, or what's being referred to as a "MAGA" account. These accounts, according to Ben Henry-Moreland, a senior financial planning nerd at aim "towards encouraging parents to provide some savings to their children that they can later use to go to college, start a business, or buy a home as young adults." Related: Social Security income tax cuts may include a huge new deduction for retirees The proposal, according to some, including the Investment Company Institute, the lobbying group for the mutual fund industry, represents a significant addition to the landscape of tax-advantaged accounts available to American families. It would join familiar vehicles like 529 plans, ABLE accounts, Roth IRAs, and custodial accounts. Don't miss the move: SIGN UP for TheStreet's FREE daily newsletter "The inclusion of the new "money accounts for growth and advancement" would foster a culture of investing among young people," the ICI said in a statement. "The accounts will help put a generation of young Americans on track to a lifetime of financial security as they see the power of compounding first-hand." UnSplash Jeffrey Levine, the chief planning officer at Focus Partners, stated on X that the accounts can be established for beneficiaries under age 8. He added that "new contributions would be accepted beginning in 2026 for beneficiaries ('beneficiary' similar to a 529 plan) under 18." There's a $5,000 maximum annual contribution, which is inflation-adjusted, according to Levine. No distributions, according to Levine, are allowed before the beneficiary's age 18, and "distributions from 18-24 are limited to 50% of the beneficiary's age 18 value." Related: How the IRS taxes Social Security income in retirement Of note, "when the account beneficiary turns 31, the account is terminated and fully distributed to the beneficiary," according to Henry-Moreland. According to Levine, investments "MUST be invested in the 'stock of a regulated investment company' that invests in diversified U.S. equities, does not use leverage, and 'minimizes fees and expenses.'" The tax treatment of these accounts creates a hybrid model that borrows elements from several existing account types. Henry-Moreland points out that "there's no tax deduction for contributing" to these accounts, placing them in the same after-tax contribution category as Roth IRAs and 529 plans. Unlike Roth IRAs, which require the account owner to have earned income, MAGA accounts would share a key feature with 529 plans by not imposing an earned income requirement for contributions. This flexibility would allow parents, grandparents, and other interested parties to fund these accounts regardless of the child beneficiary's employment status. Levine also notes that "distributions of principal would be tax-free" when withdrawals are made. What's more, "distributions used 'exclusively' for 'qualified expenses' would be a capital gain for the distributee," providing some tax advantages for specific uses, said Levine. Ordinarily, a distribution from a traditional IRA would be taxed as ordinary income while distributions from a 529 plan used for qualified education expenses are exempt from federal income tax. According to Levine, "all other distributions (from a MAGA account) would be ordinary income and, if the beneficiary is under 30, subject to an additional 10% penalty," creating a disincentive for early withdrawals unrelated to the account's intended purposes. Qualified expenses would include higher education costs, purchase of a primary residence by a first-time homebuyer, expenses related to a small business that has taken a small business loan, and post-secondary credentialing costs. To encourage adoption, the bill includes a pilot program that provides a $1,000 refundable credit from the Treasury Department-automatically deposited into a MAGA account-for every child born between Jan. 1, 2025, and Dec. 31, 2028, according to Robert Westley, regional wealth advisor at Northern Trust. Henry-Moreland described the initiative as an effort by Congress to "jumpstart the use of these accounts by establishing and funding a $1,000 MAGA account for each U.S. citizen born during that period." Related: Social Security pays U.S. workers $14.8 billion retirement windfall Despite the government's attempt to incentivize these accounts, financial planning experts remain skeptical about their relative value compared to existing options. "I don't honestly see much benefit in having a MAGA account," said Henry-Moreland. "Taxable custodial accounts have more flexibility and are nearly identical from a tax perspective, but don't have any tax penalties for nonqualified distributions, while Roth IRAs and 529 plans are more restrictive in how they can be used, but have much better tax benefits. And it's hard to argue that we need yet another type of tax-preferenced account with its own set of rules and restrictions to navigate." Others share that point of view. With government seed money, MAGA accounts provide a head start on savings that is not offered by 529 plans, IRAs, or other custodial accounts, said Westley. However, MAGA accounts come with fewer tax advantages and more withdrawal restrictions as compared with other types of accounts," he said. To be sure, the proposed legislation is part of ongoing efforts to address the financial preparedness for young Americans entering adulthood with significant expenses ahead. The proposal comes at a time when higher education costs continue to rise, housing affordability presents challenges for first-time homebuyers, and young entrepreneurs face barriers to starting businesses. Still, experts question whether this solution offers advantages compelling enough to warrant adding yet another specialized account type to America's already complex financial landscape. Related: The 9 worst states for Social Security income taxes Learn more about 529 plans. The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.
