After July 4, Trump Accounts will start accepting contributions. These new investment accounts are available to American children, and kids born between 2025 and 2028 are eligible for a $1,000 government-funded seed investment.
The basic idea of Trump Accounts is a good one: help more Americans start saving early in life and allow contributions to a child’s account from parents, relatives, employers, and charities. But the design falls short. My new Cato Policy Analysis explains how Trump Accounts work, why many claims about them are overstated, and how Congress could turn them into a simpler, more useful savings vehicle.
The biggest surprise is that Trump Accounts are often not tax advantaged for normal family contributions.
Parents, relatives, and friends can contribute up to $5,000 per child each year, but these contributions are not deductible. The money must be invested in low-cost US index funds and is locked up until the child turns 18. At that point, the account converts to a traditional IRA. Withdrawals are generally taxed at ordinary income tax rates, and withdrawals before retirement that do not qualify for a short list of exceptions face an additional 10 percent penalty.
That structure creates a problem. Family contributions go in after tax, just like money put into a regular brokerage account. But unlike a brokerage account, the investment gains are later taxed as ordinary income instead of at the lower capital gains rate. For many families, that means putting their own money into a Trump Account could leave their child worse off than using a normal taxable brokerage account, let alone a 529 plan.
A simplified example from the report shows this gap. Over 30 years, a $5,000 pre-tax investment could grow to more than $40,000. In a Trump Account funded with after-tax family contributions, the final, withdrawn value is $24,496. That is $2,451 less than the same investment in a regular taxable brokerage account. Table 2 of the report shows the full comparison across account types.
Employer contributions and sophisticated tax-planning strategies can improve the result. But that is exactly the problem. A savings account meant to help more families build wealth should not require a tax adviser.
The other major problem is the $1,000 government subsidy. Direct government transfers require rules about eligibility, approved uses, penalties, and administration. They also add billions of dollars in new fiscal costs and create political incentives for Congress to expand the subsidy in future political cycles.
Congress should keep the early-life account structure and the ability to receive contributions from multiple sources. But Congress should eliminate the $1,000 subsidy, simplify the rules, and make the accounts genuinely tax neutral.
One option is to allow all contributions to be deductible, let the funds grow tax-deferred, and tax withdrawals as ordinary income. At age 18, the account should convert not into a traditional IRA but into a Universal Savings Account. That would allow unrestricted withdrawals without extra penalties or government-approved uses.
Canada and the United Kingdom already have similar flexible savings accounts. They are simple, broadly used, and especially attractive to younger and lower-income savers.
That is the lesson Congress should take from Trump Accounts. The country does not need another complicated, restricted savings account layered on top of the existing maze of qualified savings accounts. It needs fewer, simpler, more flexible accounts that let Americans save for their own priorities.
Read the full report here.