As part of the ongoing budget reconciliation bill in Congress, the House of Representatives passed a bill that includes a new piece of tax legislation intended to help more people build wealth by investing in the stock market. If enacted, the Republican program would create tax-advantaged savings accounts for American children born between 2025 and 2028, known as Trump accounts and initially as “money account for growth and advancement” accounts.
The accounts would be seeded with $1,000 by the federal government, but families could contribute up to $5,000 annually. Upon reaching adulthood, the account holders could withdraw the funding for an approved expense such as a home, a college education, or a small-business investment.
While intended to help the next generation of American children build wealth, the program as it stands would benefit higher-wealth families more than those who currently lack savings and investment accounts. In fact, because of the tax treatment and withdrawal restrictions on Trump accounts, parents with lower incomes would be better off using traditional investment vehicles to save for their child’s future.
Here, we explain further and offer recommendations for Congress to improve the program’s targeting and economic impact.
1.Without additional deposits into the accounts of kids from families with low incomes, children of wealthy parents will primarily benefit.
Under the current proposal, every child starts with the same amount, and families can contribute up to $5,000 annually. But relatively few households hold substantial liquid wealth in the United States, meaning higher-income households are far more likely than their lower-income counterparts to have the means to contribute additional funds.
In early 2024, the bottom 80 percent of households by income held about half as much liquid wealth as the top 20 percent. And roughly a third of households had fewer than $2,000 in emergency savings in 2021. Experts recommend having at least $2,000 in emergency savings to cover unexpected expenses like health care costs or car repairs and to withstand income shocks caused by job loss.
In addition to lacking savings, low-income households are more likely to experience job and income instability. But should these households need to use their Trump accounts to cover an unexpected expense, they would be subject to a 10 percent excise tax.
Because of the proposed tax treatment of these accounts, families with less wealth may be better off putting any additional contributions into traditional investment accounts rather than Trump accounts to save for their children. Traditional accounts offer families with lower incomes more flexibility, whereas Trump accounts are likely to only benefit those who have already maxed out existing tax-preferred savings opportunities, like 529 accounts.
How could Congress better support families with less wealth?
- Make additional annual contributions to families with low incomes or low wealth to better support young people not already invested in the stock market or whose families lack significant savings. This could be done using a tiered structure based on income, or via lump sums based on eligibility for other policies like the earned income tax credit.
- Create more exceptions to the 10 percent excise tax for catastrophic events, similar to those carved out in 401k or individual retirement account plans. For example, under the Setting Every Community Up for Retirement Enhancement Act 2.0, savers can withdraw up to $1,000 annually from their 401K for a personal or family emergency expense without penalty.
- Support income stabilizing features of the tax bill to increase possibility of savings. For example, increase tax-code supports for caregivers, like the child tax credit. Other supports like guaranteed income and rental vouchers could also allow more lower-means households to contribute to their children’s future. Under the current tax proposal, federal investments in children are set to decline substantially.
- Ensure community contributions are going to kids who need them most. The proposal allows for contributions from nonprofits and charitable organizations as long as they provide equal contributions to a large group of Trump accounts based on location, school district, or another basis approved by the US Department of the Treasury secretary. There are benefits to this approach, like we’ve seen in New York City and Wabash County, IN, and the Treasury secretary can use similar models to develop guidelines for this feature.
2. As constructed, Trump accounts could contribute to asset-price inflation and cost increases
Without appropriate companion policies to increase housing supply and bring down the cost of college and small-business capital, Trump accounts that must be spent on homeownership, education, or a small business could push housing prices or the cost of tuition or capital even higher as demand increases.
The Trump accounts proposal also risks the stock market decoupling stock price growth from earnings growth. This makes it more likely that stock market return rates exceed the growth rate of the economy, which is expected to be low under the proposed tax bill. This type of asset-price inflation can amplify wealth inequality because stocks are mostly held by wealthy people.
Similar programs, like baby bonds, may face these same issues. But the potential for harmful asset-price inflation may be reduced in other contexts, as accounts are funded through tax hikes on the ultrawealthy, who tend to hold significant assets. Such tax hikes could begin to address the disparity between asset-price inflation and earnings at the low end of the income distribution. If seed deposits are universal but progressive such that a smaller share of the population receives significant funds, there is less risk that the rate of return on stock prices exceeds total economic growth.
How can Congress reduce inflationary potential and increase the potential for wealth-building?
- Ensure ample resources to prepare children of low-means families for wealth building activities, by increasing the child tax credit, offering first-time homebuyer assistance, and improving the accuracy of credit scores and the data underlying them. Young adults from low-means families could gain the most from a government investment in their future, as their parents are the least likely to have savings for them. But these same young people are the least likely to have emergency savings, good credit, and stable jobs and incomes, making it difficult for them to get a mortgage loan, get through college, and start a surviving small business, even if they have a few thousand extra dollars.
- Pair the program with policies that increase the supply of housing and bring down the costs of college and borrowing for small businesses. The federal government could consider larger investments in children’s accounts in states that adopt zoning reforms and other policies proven to increase housing supply, for example.
- Making capital gains taxes more progressive and removing the “angel of death” inheritance loophole would reduce wealth inequality and asset-price inflation potential while raising government revenue significantly. Such reforms would likely cover the cost of the Trump accounts proposal and would get lawmakers closer to achieving their budget savings goals too.
3. Without additional restrictions, these accounts could become tax havens
The United States already has tax-advantaged savings accounts for parents to support their children, like 529 accounts for education. Research finds that upper-middle-class families are the main beneficiaries of 529 accounts, as most families with these accounts earn at least $150k annually, meaning the greatest tax benefits go to higher-income families.
If parents have the means to save for their children’s future, 529 accounts are a far better deal than Trump accounts. Contributions to 529 accounts are not subject to federal income taxes, and withdrawals for qualified expenses are untaxed. Yet withdrawals from Trump accounts, even for qualified expenses, are subject to capital gains taxes. As constructed, Trump accounts would mainly benefit families who have already maxed out their 529 contributions or are looking to set up a down payment or business investment fund for their children.
How can Congress prevent the accounts from becoming tax havens for the wealthy?
- Increasing the tax rate on distributions beyond the capital gains rate for the highest-income families would reduce the likelihood these accounts predominately benefit already wealthy families.
- Limiting participation by parents’ income, reducing the contribution limit, or giving preferential tax treatment to lower-means families could ensure federal resources are focused on increasing the number of young adults engaging with the markets, rather than supporting those who already are. If the contribution limit were lowered, then the cost-savings from the tax advantage could be used to fund an extension or increase in the federal contribution, especially for families with low incomes.
Wealth-building accounts can work with the right guidelines
The fields of savings and financial inclusion are well established, and the solutions presented above reflect decades of evidence building to increase access to these vehicles for everyone. With any wealth-building program—but especially those that identify ideal use cases like homeownership, education, and entrepreneurship—additional supports are necessary to ensure young adults fully benefit from investments made by the federal government, their parents, and charitable contributors.
It’s estimated that, with no additional contributions, the initial $1,000 seed investment would grow to about $5,000 by the time the child reaches adulthood. If combined with demand-side supports, down-payment assistance, student loans and grants, reduced-cost college, and federal supports for small-business owners and community development financial institutions, this money could offer America’s children a clear path toward building generational wealth. Ultimately, the true impact of these investments will depend on the robustness of the systems and policy supports that surround them.
Let’s build a future where everyone, everywhere has the opportunity and power to thrive
Urban is more determined than ever to partner with changemakers to unlock opportunities that give people across the country a fair shot at reaching their fullest potential. Invest in Urban to power this type of work.
