← Money Rehab with Nicole Lapin
Money Rehab with Nicole Lapin
Will the "MAGA Accounts," the Proposed $1,000 Investment Accounts for Newborns Help or Hurt the Economy?
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Nicole Lapin
Okay, Money Rehabbers, I want to hook you up with some swag. If you're a fan of the pod, now is your chance to spread the love and get something for it. I'm giving away a Money News Network sweatshirt of your choosing. And if you haven't checked out our merch, you are missing out. Honestly, I think they are hilarious and so, so cute. We have a bullish sweatshirt. We have and I told you so Crypto bro sweatshirt, A money school sweatshirt, an Ebitda sweatshirt. That's eba. Duh duh. The ones who get it, get it in order to be entered to win. It is super duper easy. No purchase necessary. Here's how it works. Step one, rate and review the show wherever you're listening and please be specific. I really want to hear what you like so I can do more of that. Step two, take a screenshot of your review. And step three, email that screenshot to hellooneynewsnetwork.com with giveaway in the subject line. And that is it. You're entered. Easy peasy. And to find out if you've won, you've got to be following me on Instagram at Nicole Lapin. That's where I'll be announcing the winners. And this is my little way of saying thank you for listening, sharing and being part of the money rehab community. You truly make this show what it is and I so appreciate you and good luck. This giveaway is open to U.S. residents 18 and older. Voidware prohibited. One entry per person. Entries must be received by July 1, 2025. I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Rehab. This is a major, major week for Trump's big, beautiful bill. Of course, the President's collection of economic policy that he is trying to smush into one gigantic catch all bill. The hope is that the bill passes in the Senate this week, which would put the bill one step closer to hitting the President's desk for signature. He really wants to sign this thing by the 4th of July, but that is coming up super quickly and there's a lot left to do. So we'll see. And there is a lot in this bill. It is over a thousand pages of proposals that span topics like border security and Medicaid and AI and a whole lot more. But today I want to double click on one proposal that has gone viral. The Trump accounts. These are the government backed investment accounts for babies. There is a lot to love about free money. Don't get me wrong, especially when it's invested. But today I'm going to dig into the numbers so that you can decide if this is truly a smart investment in the next generation or a vehicle to make the wealth gap in the US worse. I'm going to break down exactly how these Trump accounts work, the long term impact of programs like these, and what these accounts could mean for your wallet and your taxes even if you don't have kids. By the way, if you want an easy summary of the other heavy hitting policies in the Big Beautiful Bill, I've done other episodes about this which I have linked in the show notes, so please check those out next. Anyway, these Trump accounts are part of a new five year pilot program tucked into the One Big Beautiful Bill Act. You'll see them called Trump Accounts in the headlines, but initially these were actually called Money Account for Growth and Advancement accounts or MAGA accounts. Washington just loves to reverse engineer an acronym. So if the Big Beautiful Bill is passed, every baby born in the United States between January 1, 2025 and December 31, 2028 would get a thousand dollar investment from the federal government so long as the baby is a US Citizen with a Social Security number. And if there are two parents in the picture and they are married, both parents have to have Social Security numbers too. By the way, I had my daughter in December of 2024 so she missed this by a matter of days. But that's just how my 2025 is going for me so far. But if you do check these boxes you're in and your baby's net worth is now $1,000, which honestly is kind of dope, I'm pretty sure that I was born with the deb definitely financial baggage at least. So I would have loved a little four figure head start. And this is a thousand dollars per child by the way. So if you have multiple babies born over the next four years, they all get their own fund. That money goes into a government established investment account. The investments must be in low cost diversified US stock index funds or a similar vehicle. So the ETFs I usually talk about on the show like SPY or voo, those probably will count. The language on how these accounts will be taxed is a little iffy and will likely get firmed up if the bill indeed gets through the approval process. But as it stands, these accounts will have some sort of tax perks, but they won't be tax free. The investment gains on these accounts will be subject to capital gains taxes. Capital gains tax is like income tax, but for your Investment gains. Now, if your child is under eight years old, they are potentially eligible to open up a Trump account. They just won't be eligible for that thousand dollar gift from the government. The government is only planning on making contributions to children born between 2025 and 2028. But if you have a young child like I do, you would still be able to take advantage of some of the tax benefits of these accounts. If you do start one of these accounts for your kid, the money in that account is locked until the kid turns 18. So if you get the thousand dollars from the government, you couldn't use that thousand bucks to cover diapers or daycare now. And even when your kids are 18, they can't just use the money for There are some rules and stick with me here because the rules are unnecessarily complicated. In my humble opinion, at age 18, account holders can only use the money in their accounts for three basic categories. 1 higher education or post secondary certificates 2. Buying their first home or 3 starting a small business. And even for those qualified categories, account holders can only take out half of the value of the account and they'll have to pay capital gains taxes on the investment growth in the account. Once the account holder turns 25, they can withdraw all the money from their account, but only if they're spending it on those three categories I mentioned. Not for rent, not for a car, not for emergencies. If they do make a withdrawal to spend on something else, they'll get hit with a 10% penalty on that money. How they would know, I do not know. This is all very far in the future, but what we do know is that when they reach 30, they can use the money for whatever they want. But still they'll need to pay capital gains tax. So like I said, you can't take the money out of the account, but you can put money into the account. It's like the Hotel California of accounts. Families and friends can add more to the account every year, up to $5,000. Intellectually I am all for these vehicles that allow people to invest as early as possible is awesome. Let the infants invest. I wish I invested as a baby. That would have been so cool. Reason being the secret to wealth is not timing the market. It is time in the market. This used to be a mic drop, one liner for financial advisors, but now it's gone a little mainstream. All it means is that the stock market historically grows year over year. So the earlier you invest, the more years of growth you get and the more times your money will turn into more money but how much money are we actually talking about here? A thousand dollar starter pack might sound like a lot to you, or it might sound like not enough. But let's do the math and see what it would actually mean for your kid. Lets say you have a kid that does get a Trump account and you never ever make any additional contributions. And that initial thousand dollars sits in an index fund earning a modest 7% a year. By the time your kid turns 18, that thousand bucks will have turned into 3,400 bucks. Still not college tuition. Probably not changing their life, but better than nothing. Now imagine you could contribute $5,000 a year. That's the max allowed. That same account now becomes $180,000. This is where I personally get a little frustrated with this plan. Don't get me wrong. I want more people to get into the market. I want the barrier to injury to be low, as low as possible. But this account makes the biggest difference to families who already have the money to save. Families who might be investing for their kids anyway. And here, by the way, is an insane exception. Contributions from nonprofits are not subject to the $5,000 annual limit for Trump accounts. Meaning if a private foundation wants to donate to your kids fund, they could give more than $5,000 any amount they want. This is another area where the exact language in the bill is a little bit fuzzy and will likely be refined before the bill passes. But as it stands right now, the rules for private foundations is that they have to make, quote, equal contributions to a large group of Trump accounts selected on the basis of location of residence of the children, their school districts, or another basis deemed appropriate by the Secretary, end quote. That quote. What's supposed to be stopping wealthy families, private foundations, from making huge contributions into only their families, Trump accounts. With the current language, foundations can't just cherry pick one account to make a big gift to. In my view, this could widen the wealth gap or narrow it. Time will tell. Maybe foundations will donate meaningful contributions to kids in poverty. Maybe family foundations will donate gigantic contributions to their kids and all their rich family friends. Kids, we do not know this, but this brings up a larger issue that some have with this legislation. It's one size fits all. In other words, every baby gets a thousand bucks, even if you're a Rockefeller. But the cool thing about this approach is that because it's universal, it can be automatic. Meaning you don't need to know about it, you don't need to sign up. It is just yours. Like a stimulus check. This makes it much easier for people who don't have access to financial education to get the financial relief that is meant for them. Financial. But $1,000 gift for every newborn is expensive. Let's do some more math. There are about 3.6 million babies born each and every year in the U.S. if each of them gets a thousand bucks, that's $3.6 billion a year for four years. That's a $14.4 billion program. For context, the federal budget in 2024 was over $6 trillion. So this wouldn't break the bank, but it, it is a significant investment. Meanwhile, the big beautiful bill as a whole is exploding our national debt. We're spending close to a trillion dollars a year just on interest payments. That is more than Medicare, that is more than defense. And every dollar we throw at interest is a dollar we are not spending on public schools, on paid leave, on early education, on things that actually do build generational wealth. And sure, because these accounts will be taxed, the government will get some of its money back, maybe even recoup its initial investment. In the case of families, that can max out that five grand limit annually. But it's likely that this will add to the national debt too. And we cannot afford that right now, especially if the advantages of this account have not been proven out. I mean, listen, at the end of the day, we could make up all sorts of hypotheticals until the vote happens, whenever it happens. But the better question is, has anything like this existed before and has that worked well? A similar concept to the Trump account has been floated in Washington before. And most recently it was proposed by a Democrat. Senator Cory Booker proposed a Baby Bonds act back in 2018, and it's been reintroduced a few times. His version is far more progressive. Each child gets a federally funded account with larger deposits for lower income families. An attempt to directly address the racial wealth gap. So there is some history here, but something like this has never made its way through Congress. Local governments and state programs have been experimenting. Connecticut, for example, launched the nation's first statewide baby Bond program in 2023. Kids born into Husky, that's the state's Medicaid program, get a $3,200 account. Since this just launched in 2023, it's still too soon to look at the long term impacts here. But there are other examples that we have abroad. The UK introd program back in 2005 called child trust funds. Every kid born between 2002 and 2011 got a starter account from the government. Lower income families got more. The accounts could be topped up and withdrawn at the age of 18. The program was popular but ultimately scrapped in 2011 due to budget cuts. Still, the idea had legs. Many British families kept saving in these private accounts modeled on trust funds and the government reaped long term benefits in terms of reduced financial dependency among young adults. So if we don't have a clear sense of the ROI of this program, what would be a better version of this proposal? Well, it would certainly be less expensive if these accounts were only open to families with economic need. Not only would it be less expensive, but it would also ensure that the power of these accounts went to people who need it most. So while these headlines are so cute and babies get savings accounts, the reality is the families who need it the most won't see much of a benefit here. And the ones who don't need it get another wealth building tool. I am not mad that my daughter missed this, but I am mad that this whole thing is built to look fair. But it isn't. For today's tip, you can take straight to the bank if you're already contributing to a 529plan for your kid. Don't forget to check if your State offers a 529 plan contribution match. Some states, not many, but a few, offer incentives for low to moderate income families to contribute, including dollar for dollar matches up to a certain amount. But just know some of these programs require you to apply separately, they're not automatic and they fly under the radar. So if you're in states like Nevada, Kansas or Arkansas, please look into it. You could be leaving hundreds or thousands of dollars on the table just because you didn't fill out one more form. Free Money. We love to see it. Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Money Rehab's executive producer is Morgan Lavoy. Our researcher is Emily Holmes. Do you need some Money Rehab? And let's be honest, we all do. So email us your money questions moneyrehaboneynewsnetwork.com to potentially have your questions answered on the show or even have a one on one intervention with me. And follow us on on Instagramoneynews and TikTokoneynewsnetwork for exclusive video content. And lastly, thank you. No seriously, thank you. Thank you for listening and for investing in yourself which is the most important investment you can make.