The One Big Beautiful Bill Act (OBBBA) introduced President Trump‘s signature savings accounts, known as Trump accounts, to the mix of existing asset-building policies. This post explores the structure of Trump accounts, as well as other proposals designed to help families build wealth.
Trump accounts allow parents and employers to contribute up to $5,000 per year (indexed for inflation) to individual retirement accounts on behalf of children under the age of 18, regardless of their parents’ income. Each child born between 2025 and 2028 will also receive a $1,000 seed deposit from the federal government. Funds in these accounts can be invested in any mutual fund or exchange-traded fund that tracks the S&P 500 or is comprised primarily of U.S. companies. While contributions made by parents are not tax-deductible, contributions made by employers, capped at $2,500 per year (also indexed for inflation), do not count towards employees’ taxable income. Taxes on investment earnings are deferred but taxed as ordinary income upon withdrawal. Unqualified withdrawals, such as purchasing a car, are subject to an additional 10% penalty.
### Arguments for and Against Trump Accounts
Proponents of Trump accounts argue that these accounts will provide financial stability, greater economic opportunity, and a higher incentive to save for millions of American children. Assuming medium returns, Trump accounts are estimated to yield a balance of $303,000 by age 18 if maximum contributions are made. Even with no additional contributions beyond the $1,000 initial deposit, the accounts are predicted to yield a balance of $5,800 by age 18. Several large companies, including Dell, Uber, and Goldman Sachs, have voiced their support and pledged to contribute to accounts for their employees’ children.
However, critics point out that Trump accounts depend primarily on family and employer contributions, which means they will disproportionately benefit wealthy Americans. Research from other wealth-building policies suggests that wealthy individuals are significantly more likely to contribute to voluntary asset-subsidy schemes and hold considerably more wealth in tax-advantaged accounts than asset-poor families. A wealthy family could build a $150,000 nest egg by the time their child turns 30, while a child from a low-income family is likely to be left with about $2,500.
Critics also argue that the tax benefits for Trump accounts are less generous than those for existing college and retirement savings programs, such as 529 college savings plans and Roth IRAs. Trump accounts, therefore, do not offer much of an additional incentive to save. Additionally, Trump accounts add to an already crowded market for savings accounts, with families able to choose from at least 11 different tax-advantaged savings vehicles. Unlike some alternatives, Trump accounts are seen as subsidizing the transmission of intergenerational wealth for those who already have wealth.
### Baby Bonds
First proposed in 2010, Baby Bonds are universal, financially progressive child trust funds. The government would make an initial deposit into an interest-bearing account on behalf of each newborn baby in the United States, with additional deposits made throughout their childhood. Children from the lowest-wealth households would receive the largest endowment. At age 18, individuals would gain access to the funds, which could only be used to invest in wealth-generating assets, such as a home, post-secondary education, or a small business startup. While Baby Bonds are nominally race-neutral, Black, Hispanic, and Indigenous children, whose parents hold significantly less wealth than their white counterparts, would benefit the most in terms of asset ownership and wealth accumulation.
The program is estimated to cost roughly $60 billion per year, assuming an average endowment of $20,000 and 3 million babies enrolled annually. Funding could come from raising the estate tax, charging fees to manage the Baby Bonds trust, or instituting a wealth or millionaire’s tax. Some scholars believe that if Baby Bonds reduce dependence on social safety net programs in the long run, a federal program could save the government money over time. Baby Bonds are not meant to be a standalone policy and should be supplemented with robust safety net programs and income supports that can meet individuals’ day-to-day economic demands.
### Differences Between Baby Bonds and Trump Accounts
Unlike Trump accounts, Baby Bonds directly address wealth inequality. In 2020, the wealthiest 10% of the U.S. population held nearly three-quarters of the country’s wealth. Wealth disparities are more extreme along racial lines, with the typical Black household holding 15% of the wealth of the typical white household, and the typical Hispanic household holding 20%. A significant portion of the racial wealth gap can be attributed to inheritances and intrafamily gifts, with wealth transfers among white families both larger and more frequent than transfers within Black and Hispanic families.
Of the hundreds of billions of dollars that the federal government annually spends on asset-building policies, millionaires receive an average tax break worth more than 700 times the average tax break received by households earning $50,000 per year. Baby Bonds were proposed as one method for closing the dramatic racial wealth gap. With the explicit goal of ensuring that all children born in the U.S. begin adulthood with a sizeable nest egg, combined with the program’s progressive design, Baby Bonds could go a long way towards eliminating the transmission of economic advantage or disadvantage across generations.
### Congressional and State-Level Developments
Senator Cory Booker (D-N.J.) introduced federal Baby Bonds legislation, termed the American Opportunity Accounts Act, in 2018, and reintroduced it in subsequent years. American Opportunity Accounts would have automatically provided each child born in the United States with an initial deposit of $1,000, supplemented by annual, progressive contributions of up to $2,000 based on family income. By the time these children turned 18, the account balances of the lowest-income beneficiaries were projected to reach $46,000, assuming an annual return of 3%. The funds could then be used for a restricted set of asset-building purposes, such as purchasing a home or pursuing post-secondary education. Funding for the accounts would come from increasing the top tax rate on long-term capital gains and dividends, eliminating the step-up basis for capital gains at death, and increasing the estate tax rate to at least 45% on inheritances above $3.5 million. These changes to the tax code would raise approximately $700 billion in revenue over the next decade, more than offsetting the program’s estimated $650 billion cost.
Connecticut is the only state to enact statewide Baby Bonds legislation. Connecticut’s program, which went into effect in July 2023, provides each child born to a Medicaid-eligible household with $3,200 at birth, an endowment that is projected to grow to between $11,000 and $24,000 by adulthood. Upon turning 18, beneficiaries will be allowed to use their Baby Bonds funds to make a down payment on a home, start a small business, pay for college tuition, or save for retirement. Connecticut’s Baby Bonds program has enrolled approximately 33,000 low-income babies born in the state since July 2023, with the total value of the trust increasing from $381 million to roughly $485 million. Connecticut Treasurer Erick Russell explicitly differentiated his state’s Baby Bonds program from Trump accounts, stating that Connecticut Baby Bonds were created to narrow Connecticut’s generational wealth gap by investing directly in children from low-income families, whereas Trump Accounts advantage families who already have the ability to save, while leaving behind those who don’t.
Economic Research on Baby Bonds
No federal Baby Bonds program exists, but several researchers have simulated a federal Baby Bonds program. Simulations find that a race-neutral, financially progressive Baby Bonds program would disproportionately benefit Black and Hispanic families. Assuming a $1,000 initial endowment, a 1 to 3% annual rate of return, and progressive annual contributions of up to $2,000, Black children would receive a median account balance of $27,500, Hispanic children a balance of $19,800, and white children a balance of $7,100 by the time they turn 18. At the upper end of the distribution, 31% of children receiving the top 10% of benefits would be Black. These studies consistently find that a federal Baby Bonds program would narrow the racial wealth gap.
Zewde (2020) estimates that Baby Bonds would reduce the Black-white wealth gap from 15.9x to 1.4x at the median. Weller, Maxwell, and Solomon (2021) evaluate five policies designed to close the racial wealth gap and find that Baby Bonds would result in the single largest reduction in racial wealth inequality. Setting race aside, Cosic et al. (2024) show that a Baby Bonds program would have dramatic redistributive effects along the income ladder: the amount of wealth held by individuals in the top income quintile would fall from 14x the amount of wealth held by individuals in the bottom quintile to 5x. These authors also find that using Baby Bonds to pay for college tuition would significantly reduce student loan debt, especially for Black and Hispanic students. Even with this potentially large reduction in the racial wealth gap, significant wealth disparities would remain. Weller, Maxwell, and Solomon (2021) estimate that it would take an initial transfer of $192,711 in 2020 to fully close the racial wealth gap by 2060. However, combining Baby Bonds with other wealth-generating policies, such as forgiving student loan debt or addressing housing and lending discrimination, could double the effect of Baby Bonds in closing the racial wealth gap.
Child Development Accounts
Child Development Accounts (CDAs) are investment accounts designed to help parents save for their children’s post-secondary education. CDAs typically subsidize savings through government contributions, matching incentives, and tax benefits. As of 2020, approximately 500,000 children had participated in one of 70-plus CDA programs across 36 states. Research from the original CDA pilot, the Savings for Education, Entrepreneurship, and Downpayment (SEED) National Initiative, suggests that providing families with a state 529 savings account, a $1,000 initial deposit, and one-to-one matching marginally increased savings. In the same randomized experiment, only 62% of eligible families opened accounts, and the most disadvantaged families were the least likely to opt in to the program. A later wave of SEED, which began in Oklahoma in 2007, automatically opened state 529 savings accounts for members of the treatment group. By 2014, the average account balance among the treatment group was $1,851—a striking 6x higher than the control group. SEED OK reported several non-pecuniary benefits as well, such as improving parental expectations of their children’s educational outcomes.
Similar to Trump accounts, families can contribute to CDAs, with many CDAs offering matching programs. The issue with this approach is that more advantaged children continue to have more assets and parents with the greatest financial knowledge save more than parents with lower financial literacy.
529 Savings Plans
Los planes de ahorro 529, como los CDAs, son cuentas de ahorro con ventajas fiscales que permiten a los padres guardar fondos para la educación de sus hijos en la universidad, escuela técnica, posgrado o educación privada K-12. A partir de 2024, se habían ahorrado aproximadamente $508 mil millones en 16,8 millones de cuentas 529. Si bien las contribuciones a las cuentas 529 no son deducibles de impuestos a nivel federal, las inversiones crecen exentas de impuestos y no están sujetas a impuestos sobre ganancias de capital al retirarlas. Muchos planes de 529 patrocinados por el estado permiten a los padres deducir las contribuciones a las cuentas 529 de sus ingresos imponibles hasta un límite determinado.
Críticas a los planes de ahorro 529
Los críticos de los planes de ahorro 529 argumentan que estas cuentas funcionan efectivamente como refugios fiscales para los ricos, dado su papel en reducir las obligaciones fiscales de los contribuyentes de alto ingreso. Las familias ricas también son significativamente más propensas a abrir y contribuir a las cuentas 529. En 2010, la riqueza media de las familias con una cuenta 529 era aproximadamente 25 veces la riqueza financiera media de las familias sin una cuenta 529.
