Don't Mess With Taxes

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Is the money account for growth and advancement, or MAGA, account for children, now renamed Trump Savings, necessary?

I was going to use that as this post's headline, but it's a tad long. Plus, an editor once told me that every question headline can be answered “no.” I disagree, but this time, he’s probably right.

James, a reader of the ol’ blog, also apparently agrees. In a comment on my post last week that looked at some of the tax changes in the GOP’s House-passed One Big Beautiful Bill (OBBB), he noted:

Basically shifting the [Trump Savings] tax burden from the parent to the child when they get older (at the capital gains rate instead of income tax tables). And if the money is withdrawn before they turn 30 years old, it must be used for education, homeownership, or business startup. … Do I have this right? If so, it seems pretty niche to me (considering existing 529 already does this for the educational part). Couldn't they have just expanded the 529 to homeownership and business? Or am I missing something? 

No, James. You are not missing things. You are bringing up good points.

Others also have questioned the practical, not political, reasons for these new, limited savings plans. And they've also pointed out some problems with Trump Savings.

It adds to the federal deficit: First, there’s the cost to the U.S. Treasury.

Overall, parents could open a tax-favored Trump Savings account for any child younger than age 8. Babies born in 2025 through 2028 would receive $1,000 for the account.

The country’s deficit already is a sticking point with the OBBB, almost derailing it in the House. You can be sure Senate deficit hawks will question using the $1,000 per account in the four-year pilot program for newborns

Sure, when you're talking a $3.7 trillion bill, it doesn’t really look like that much more from the federal spending perspective.

The National Center for Health Statistics reports that in 2023 there were 3,596,017 births registered in the United States. For simplicity’s sake, let’s say that birth rate holds over the newborn’s time frame. That’s more than 14 million citizens getting  $1,000 each in Trump Account seed money, or “only” $14 billion.

And that’s just for pilot. Uncle Sam will lose revenue because of the preferential tax treatment of these accounts. The Joint Committee on Taxation estimates that overall the MAGA/Trump accounts would cost the federal government about $17.2 billion over the next decade.

How much interest is there? Second, how many parents are clamoring for these accounts. If there’s not widespread, committed buy-in, then then at best the funds will languish.

We’ve already seen that tax-favored 401(k) workplace savings plans, where employers also usually contribute, aren’t maxed out. Heck, a lot of people who could open a 401(k) don’t. Why? They need the money to cover daily expenses.

The Setting Every Community Up for Retirement Enhancement (SECURE) Acts changes have helped help boost retirement accounts by making 401(k) enrollment automatic. But just setting up an account, tax-deferred or taxable, is not a guarantee that the persons it was created to help will maintain it.

Family’s fragile finances: One reason there might not be widespread enthusiasm for the accounts is the real-life economics they face.

Surveys repeatedly show that most Americans can't afford to cover a $1,000 emergency expense. It’s highly unlikely they could, even if they wanted to, come up with any amount, much less the maximum $5,000 annual contribution, to put into Trump Savings.

Even if they do start an account, financial pressures likely would mean irregular, at best, contributions.

Intrusive Uncle Sam: Privacy issues also have been raised in connection with the Trump Savings provision that the federal government will be more involved in individuals lives than they would like.

An overview of the accounts from the House Ways and Means Committee says —

If the Secretary of Treasury determines that an eligible individual does not have an account opened for them by the first tax return where the child is claimed as a qualifying child, the Secretary shall establish an account on the child’s behalf, taking into account, to the extent possible, the parents preferred custodian and investment fund. Parents will be provided the option to opt out of the account. 

Wow. Did this phrase in the tax panel’s notation above also catch your eye? “Taking into account, to the extent possible, the parents” wishes regarding the account.

Talk about Uncle Sam literally becoming a pushy relative! Even though the money going into the account is free, other than it comes from everyone’s tax dollars, having the Treasury open an account for someone else's children definitely could be classified as a nanny state move.

Plus, it definitely seems to be pushing the limits of taxpayer privacy when Treasury starts reviewing our returns with an eye on what financial plans we are making for our children, without knowing what other moves we have planned.

And it also adds another financial matter for people to worry about, unless they opt out. Again, the much dreaded government overreach.

OBBB effects on 529 plans: Finally, since today is National 529 Day, it’s also worth a look at how the 529 plans that James cited in his blog comments at the start of this post could be affected by the pending tax+ measure.

Many of the OBBB provisions, not just the new MAGA/Trump Savings accounts, could affect 529 plans, as noted in a recent article by Jeffrey Trull for the Saving for College website.

Obviously, as Trull notes, the new OBBB account scheduled to launch in 2026 could compete for college-savings dollars. He lays it out in the following table:

   
The bottom line, writes Trull, is that the new Trump Savings accounts could appeal to families who want broad life-stage flexibility and are comfortable paying capital-gains tax on growth.

However, he notes, 529 plans would still offer the strongest tax break for pure education funding.

Check out Trull’s full article for the other potential OBBB-529 issues.

Bottom line “meh” assessment: As for Trump Savings overall, the account appears to be a purely political move.

The OBBB is catching heat for providing, as did the Tax Cuts and Jobs Act that it is trying to extend, more tax help to the wealthy than to average, working-class taxpayers. Adding Trump Savings for children gives the GOP another talking point to highlight as family friendly.

In reality, though, the accounts benefits, both financially and tax-wise, are relatively paltry when you look at other tax-preferred savings options that already are available.

Plus, contrary to long-standing Republican calls for tax simplicity, the accounts with their various child ages, assorted kick-in and distribution dates, and different types of tax treatment in different situations are relatively complicated and potentially confusing.

The last time I asked, taxpayers weren’t asking for more complex so-called tax help.

You also might find these items of interest:

• Extra RMD money could make a good 529 plan gift
• A look at some tax changes in GOP’s House-passed One Big Beautiful Bill
• 2nd W&M tax proposal includes popular, controversial, and costly provisions

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