The Truth About Trump Accounts (Read the Fine Print) | Diving In

There's been a lot of talk about what the president's
calling Trump accounts. So I want to dive in with
you and explore how this new policy will affect you,
your family, and our economy. Here's the point. Babies get
a thousand bucks, they get a little steak in the
stock market, and over time, we're told the money grows
into something much bigger. That's one story. Here's the reality.
This is really two policies jammed together. One is a tiny,
temporary giveaway for babies and only those babies born in
the narrow window. The other is a brand new, permanent
tax break. Hey, there's a lot to unpack here, so
let's get into it. This is a story in five parts. First,
let's talk about the baby story that they're selling. Second,
I need you to know about the real story, which
is a tax break. Third, I want to dig into
who this helps. Spoiler it's well off families, and the
reality is that this will increase inequality. Fourth, you may
have seen some spectacally big numbers from the wide house.
You're going to be a lot better off if you
understand how those numbers are misleading. And Fifth, as you
think about rearranging your financial affairs, let's ask, is a
Trump account even the right account for you? Here's the
big picture. The baby story it's simple, it's popular, and
it's got some genuinely progressive roots. The tax story, it's
more more familiar. It's another wrinkle in the tax code,
another way for families who already have money to save
and do a little better, which means this policy, in fact,
is not about giving poor kids a leg up. Instead,
it's more likely to widen the gap between rich and poor.
So let's start with the bit the administration wants you
to notice. The White House says that babies can get
one thousand dollars from the government. They talk about the
magic of compound interests. They show you glassy future balances.
They wrap the whole thing and the language of opportunity
and ownership and getting a head start in life. Politically,
this is really clever, because the idea of handing a
child and asset at birth it's not crazy. In fact,
it's got a long and really pretty progressive history. There's
a whole tradition of what economists called child development accounts
or baby bonds. It's public money set aside for kids
so that where your parents start in life matters a
bit less for where you end up. That's the moral
idea underneath all of this. If wealth inequality starts early,
then maybe policy should start early too. And the progressive
versions of this idea, they're usually trying to do three things.
They want to make the contribution automatic, they usually make
it a whole lot bigger, and they try to steer
more of it towards the kids who start with less.
Said that, in that case, the policy actually does what
it says on the tin. Like take Senator Cory Booker,
He's got a baby bond proposal. It's started with a
public deposit of birth and then are piled on larger
annual public contributions for poorer kids. The whole point it
was to offset the unequal starting wealth, not just to
provide tax subsidies for the wealthy to pass on more
cash to their kids. Now, let's compare that with Trump accounts.
Trump accounts take that broad moral intuition and they shrink
it right down. They might even flip it on its head.
So what is the baby part exactly? Well, if a
baby's born between January one, twenty twenty five and December
thirty first, twenty twenty eight, they can get a one time,
one thousand dollars government contribution. If someone opens a Trump
account for them, that's it. One thousand bucks, one time,
and only if you're lucky enough to be born during
Trump's second term. So yeah, look, there really is a
baby bond sort of thing going on here. But mate,
this is baby bonds after they've been through the wash
too many times. It's the same idea, it's only smaller,
it's thinner, it's more faded. And then come January one,
twenty twenty nine, conveniently, just after the next presidential election.
I'm sure that was a coincidence, that baby bond, it
just vanishes all together. No other babies will ever get
a penny. So the part of this policy with a
progressive pedigree, that's the part that the administration made temporary,
small and disposable. Hey, there's one practical thing I need
you to know this program. It's not you have a baby,
you get money. You've got to claim it if your
kid's in the eligible birth window. So basically, if you
gave birth under the second President Trump, you need to
sign in through the IRS submit Form forty five forty seven.
That's not a joke. That's the form number, and then
grind through the account election and activation process, and at
the end, your baby will be one thousand dollars richer.
So let me say something plainly. If your kid was
born after January one, twenty twenty five, or you reckon
you might become a parent before the end of twenty
twenty eight, go and fill out that form. Your baby's
going to be one thousand dollars richer. I want the
best for you. I want the best for your baby.
But that plan it also gives away the priorities. The
headline grabbing, family friendly, populist part of this thing only
applies to four birth cohorts. It only hands over one
thousand dollars. It makes families do paperwork to get it,
and then it vanishes. So let's turn to the real policy.
This is a bit they're not talking much about. The
lasting part of the Trump accounts isn't the thousand dollars seed.
The lasting part is the account and the tax breaks
that people get for pouring their own money into it.
Any eligible child can have one of these accounts opened
before they turn eight. In these accounts will have tax advantages.
That bit's going to keep on keeping on. It'll be
there for future babies long after the next election. So
if you've got one of these accounts, then during childhood,
families can chip in up to five grand a year
if they've got it. Employers can also add up to
twenty five hundred bucks a year in a way that
doesn't count as taxable income to the employee, and that money,
of course, that does count towards that five thousand dollars cap. Look,
let me slow down here, because this is where the
economics really lives. Suppose that your employer hands you twenty
five hundred dollars in wages. Normally, that's going to show
up as income. That's going to go on your tax return.
You're gonna have to pay tax on it. Now. So
maybe your employee gives you twenty five hundred, but you
only get to keep fifteen hundred. But if instead the
employer drops that money into a Trump account for you
and your kid, the law says, we're not going to
count that as taxable income. Right now, your kid's account
it's going to get the full twenty five hundred bucks.
So this is what economists call a tax expenditure. It's
the government saying, rather than writing you a check will
help you out by collecting less tax, so the support
flows through the tax code instead of through direct spending.
But the effect and importantly the cost of the government
is the same as if the government had sent you
a check as a reward for saving for your kid.
And here's the thing. Because it's a cut and your
taxable income, it's worth more if you pay a higher
tax rate. So if you're in a higher tax bracket,
which is to say, it's like the government is making
an even bigger contribution to savings put away for the wealthy. Okay,
that's the employer contribution. And part of this, let's turn
back to the family contributions, because both family and employer
can contribute towards saving for the kid. On the family side,
the tax break is actually a whole lot weaker and
a little more complicated. So if a family puts in
its own money, there's no upfront deduction. Instead, the family
side benefit it's mostly this the money that you put in.
It's the money your employer gives you after tax. You
put it in and it can grow without annual tax
on the gains like dividends or interests that accrue while
it sits in the account. That then means that your
money or your kid's money can compound without having to
compete with a taxman taking his slice every year. But
you will or your kid will have to pay tax
at the end when they withdraw the money. This type
of tax break, it's called tax deferral. Right, you do
pay tax, you just defer it till after you've compounded it.
And tax deferral can help, but it's often not the
best deal. Look, I'll come back. I'll say more about
that in the moment. So the real policy here isn't
it is. It's not the government building wealth for children.
It's the government creating yet and now that tax favored
place to stash savings that you can give to your
kids if you've got the money to give them. And
that brings us to the question that really matters who
wins from this tax break. Look, I wish the families
that are struggling the most, but unfortunately that's not what
this is about. Those families. Well, hopefully they'll watch this
video and go grab the thousand bucks, but that'll be
the end of the story for them. Now, wealthier families,
they've got more money, they're more likely to be able
to add money every year. They're more likely to be
in the types of jobs where their employers are going
to offer employer contributions to this savings plan. And they'll
get real value out of the tax shelter because they're
actually paying federal income tax at pretty high rates, and
so that means that their benefit from dodging that tax
makes it all the more worthwhile. So that's the heart
of it, and once you see that, the logic falls
out pretty quickly. This policy isn't so much opportunity enhancing
as it is inequality exacerbating. It's more likely to lock
in that old American rule. It's the one we all deny,
but it returns to the reality of generation after generation.
The rule is that your parents' station in life helps
determine yours, and these accounts give them another way of
helping reinforce this inequality. So when politicians talk as if
this is going to give every child an equal start,
it's deeply, deeply misleading. Sure, the same account exists for everyone,
but the families with money, with higher tax brackets and
better jobs are going to walk away with a whole
lot more. And that brings us to the numbers let's
talk about those great, big, glossy numbers. And I want
to pause here because you can probably hear already from
my tone of voice. I'm not impressed by the government,
which has been floating some genuinely enormous figures. And so
what I want to do is square the circle for you,
so that you can understand what the government's saying, how
it got there, and what your reality might look like.
The White House put out a bunch of projections on
Trump accounts dot gov that show that kids with Trump
accounts might end up with huge balances because of this policy,
hundreds of thousands, possibly even millions of dollars. These claims,
they're ridiculous, they're dishonest, and they're misleading. Look, I can
say those things while still conceding the arithmetic is real,
but it's really in the narrowest possible sense. Those gigantic
balances that Trump Accounts dot gov is promising they lean
on three things that are wildly unrealistic for most families.
First of all, decades of private contributions. The big balance
that they say you're going to get at the end,
it's not from the government giving your baby a thousand bucks. No,
these are the results of simulations in which they assume
that you feed five thousand dollars in year after year
for eighteen year, the first eighteen years of your kid's life.
Oh and if you really track the footnotes on the
White House website, you'll figure out that not only do
they assume you're putting five thousand dollars every year for
the first eighteen years of your kid's life, they assume
your feed in another seven grand a year into an
IRA for the decade after that. So, look, the government
did open the Trump account with one thousand dollars balance.
But really, what's going on here is they're saying, if
you do a lot of saving, you'll have a lot
of money. Look, mate, you don't need much math to
figure that out. Second, they made some unbelievably rosy assumptions
about how the stock market will perform. Remember, these accounts
are going to be invested in stocks, and so they
assume incredibly strong stock market turns across long stretches of time.
Quite literally, this is not a joke. This is literally
the case. They're assuming that the highest ever recorded rates
of return will just conveniently happen to repeat themselves when
you invest in a Trump account. Thank you President. Hey,
look I get it, that could happen, I guess. But
this is a value saying. When I try to communicate
facts to people, I usually try to represent what's likely
to happen instead, and what's likely to happen is very,
very different. Third inflation. A dollar in thirty years sounds
like a dollar, but it's not. Inflation. Swollen future figures
look impressive in a press release or on a website,
but they turn out to be a whole lot less
impressive when you try to spend them at a grocery store.
If I tell you what something might be worth decades
from now in nominal dollars, I can make the number
look huge, even when it's actual purchasing powers a lot
less impressive. The honest way to talk about the future
is to take these numbers and adjust for changes in
the cost of living. That's not what the White House did,
and it makes a big difference. So overall the White House,
it's big, glossy numbers showing a best case wishful thinking
scenario in which families keep doing a whole lot of contributing,
markets repeat their record returns, and inflation does the rest.
And look, the point I want you to draw from
this is do your own math, because the White House
numbers are ridiculous. Okay, Finally, I want to address the
question is this even the right account for you? Yes,
a three thousand bucks is terrific, but what about the rest?
Should you be stashing money for your kid's future in
a Trump account? Here's the uncomfortable truth. The answer is
that for a lot of families, it's not going to
be the right choice. Remember when a family contributes to
their kids account, the main benefit is tax deferral. The
money grows without an annual tax on the gains. That helps,
but usually you've got better options. For a lot of families,
Trump accounts a less tax advantage than the alternative that
you already have. These new Trump accounts they just add
another layer of clatter to an already clartered tax and
saving system. So let's just talk through a couple of
the alternatives that I want you to look at instead. So,
if the goal is to fund your kid's education, a
five twenty nine is often better, first of all, and aside,
who the all names these things? A five twenty nine
as a way of saving for your kid's future Honestly,
that sounds like a high way to Maine, not a
savings plan. But the thing that's important about a five
twenty nine is when you pull money out for education,
it comes out tax free, not tax deferred like a
Trump account. Tax free. That usually makes it a better
savings vehicle. If your goal is retirement saving for a
kid who's got earned income, a wroth IRA is usually
the best option because the long run tax treatment is
usually more generous. Look, it's another reasonable savings plan with
just another terrible name. I know someone needs to go
through this, someone from marketing. If your goal's just flexibility,
then even just a plain old taxable brokerage or custodial
account can stack up surprisingly well because those are treated
as capital gains, and so you get a lower tax
rate than you would get on a Trump account withdrawal. Okay, look,
if all of that sounded like a lot of made
up words and financial mumbo jumbo, let me just come
back to the simpler advice. Do your homework talk with
a financial advisor, or here's a surprisingly cheap alternative, talk
with claude or chat GPT, which in this domain often
give better advice. And I say that having checked before
I give that advice. It's important you do this work.
Don't put it off. It really matters, and ten minutes
of research could well be worth thousands of dollars to
your kid. So go ahead and do it. Press pause
on the video if you need to. Doing your homework
here really pays. And it pays because the account that
the administration is hyping Trump accounts. They're not just over
solid for a lot of families, they're not even the
best tool in the draw. Okay, so where does this all?
I don't want to overstate the criticism. If you're eligible
for the thousand dollars, claim it free money is free money. Wait,
I'm an economist. It's not free to the rest of us,
but it's free to you. And I hope you get
the point. If some families use this as one more
savings tool, terrific. But let's not pretend that this is
some great equalizing reform. The baby bond bit, which could
be is small, temporary, and gone in twenty twenty nine.
The lasting bit, the bigger bit, is another tax favored account,
one whose main benefits flow to people with money to save,
employers willing to contribute, and tax rates high enough that
dodging taxes as a big payoff. That's not any sort
of anti inequality policy. If you actually wanted to shrink
unequal starting wealth, you'd make the public contribution big, are permanent,
and better targeted at the kids who need it. If instead,
what you want to do is hand already comfortable families
one more tax favored shelf for their savings, it build
something that looks a lot like this. And if you
wanted to take that second thing and dress it up
to make it politically palatable, well you'd name it after
a baby. And that mate is the real economics lesson here.
Not every policy with a smiling baby on the label
is about equal opportunity. Sometimes it's just a temporary populist
giveaway stitched onto a permanent tax break for those who
need at least