The new Trump accounts, launched July 4th, have generated both hype and confusion. Some claim these accounts will revolutionize the social safety net and welfare systems. Some say this program will make more people capitalists, or may serve as an alternative to social security in the future, especially with the president’s interest in Australia’s retirement policy. Since Social Security was first passed into law, the challenge has been how to address economic insecurity. Instead of taxes and transfers administered by the government, Trump Accounts offer individual ownership, long-term investment, and voluntary contribution.
These projections aren’t wrong so much as incomplete. They miss the real benefit of Trump Accounts: creating a framework for broad-based direct-transfer philanthropy.
Trump Accounts are investment accounts established for children. Eligible children born 2025-2028 receive a one-time $1,000 federal taxpayer contribution. Family members, employers, charitable organizations, and others may also make contributions. During childhood, the funds are generally invested in broad, low-cost funds holding American equities, and withdrawals are heavily restricted until the child turns 18.
From a tax standpoint, Trump Accounts are decidedly unimpressive investment vehicles.
The $1,000 government seed money for children born during Trump’s second term, by itself, will be nice but not life-changing for those children when they turn 18 ($3200-$4200). Should they elect to keep that money invested until they retire, the impact grows substantially ($175,000 – $250,000). Yet from a tax standpoint, Trump Accounts are decidedly unimpressive investment vehicles. So if the tax case is weak, where is the upside?
Parents and relatives who contribute money to children’s Trump Accounts receive no tax benefit. And their kids will have to pay taxes on the gains in their accounts. A Roth IRA, on the other hand, allows after-tax income contributions whose gains can be withdrawn tax-free. The catch is that a child has to generate income to be eligible to contribute to a Roth IRA. These accounts allow earnings to grow without tax liability, and, provided retirement criteria are met, withdrawals are completely tax-exempt. One may also retrieve original contributions at any time without incurring federal penalties or taxes.
Better still are 529 accounts, where parents receive tax benefits for contributing, and the child doesn’t pay taxes on the gain as long as they use the funds for a qualified activity. In the case of 529s, the focus is primarily on education, but contributions can also be used to fund Roth IRAs. Explicitly designed for educational expenses, these plans offer tax-free growth at the federal level, with zero tax consequences for qualified spending on tuition and related costs. Furthermore, many states provide additional tax incentives for participants. Under the SECURE 2.0 legislation, residual funds within a 529 plan can now be transferred into a beneficiary’s Roth IRA, subject to a lifetime cap and specific account aging requirements.
The real benefits of the Trump Accounts … if there is widespread use of the accounts, big swaths of the public will gain a front row seat to investing and compound interest.
The real benefits of the Trump Accounts, however, will depend on how people choose to use them. For example, if there is widespread use of the accounts, big swaths of the public will gain a front row seat to investing and compound interest. They will see, and have a stake in, the engine of the economy: public companies. This sense of ownership can help strengthen independence as these children grow up.
While this may not lead to a total “ownership society,” it gives the next generation significant skin in the game. Furthermore, these accounts will be much better than artificially lowering interest rates and reducing credit underwriting standards to encourage home-buying, as was done in the 1990s and early 2000s. The big question is whether Trump Accounts will be widely adopted by folks who are less educated, less affluent, and less investment-savvy. (RELATED: Baby Bonds, Billionaires, and Making Capitalism Cute Again)
Another potentially huge advantage of Trump Accounts is whether they will be utilized for large-scale philanthropy. For the first time, billionaires can distribute some of their immense wealth directly to hundreds of thousands, millions, or even tens of millions of people without politicians or NGOs getting a rather sizable cut. In an era of super-wealth, Trump Accounts may provide an avenue for super-philanthropy.
We already see this model playing out. Michael and Susan Dell have pledged over $6 billion to put $250 in the Trump Accounts for up to 25 million children under 10 years old who do not qualify for the $1,000 from the federal government because they were born before 2025. Other wealthy individuals have pledged to match Dell’s contribution in their home states. Ray Dalio has made this pledge in Connecticut, and Brad Gerstner has made it in Indiana.
But do these pledges constitute the tip of a trillion-dollar iceberg, or are they the noble but quixotic fancy of a few wealthy individuals? We can hope it is the former. Should the billionaire class take up this cause in earnest, we may see the greatest poverty alleviation program in history.
And unlike government welfare, insurance, or entitlement programs, Trump Accounts won’t require any of us to pay higher taxes. These are investment retirement accounts that will hold real assets, not government IOUs. And they constitute private property, not a slush fund for politicians to hand out money to their constituents. But will future Congresses exercise restraint to let these accounts operate without trying to tax them or to take a cut? The stability of other retirement account programs (IRAs, Roth IRAs, 529s, etc.) suggests that Trump Accounts will not be co-opted easily.
But when it comes to politicians in Washington and money, a healthy dose of caution is always warranted. The government created the legal framework for these accounts. The American people will determine whether they become something transformative.
READ MORE from Paul Mueller:
Baby Bonds, Billionaires, and Making Capitalism Cute Again
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