The Retired Investor: Trump Accounts Could Be Seed Money for America's Future Generations

About 3.6 million babies are born in the U.S. every year. Imagine that at birth, each one was given $1,000 to invest. Any ideas how much that would be worth by retirement age?

 

The short answer is $1,029,500, assuming you invested the money in the S&P 500 Index at an annual average return of 6 percent and were not allowed to touch it until you retired at age 68. In one fell swoop, that could solve the Social Security issue facing future U.S. generations. Hats off to the president on this one.

 

This new kind of savings account was part of the One Big Beautiful Bill Act, and this "Trump Account" may turn out to be one of the most beautiful pieces of legislation in years. Over the next few years (until Dec. 31, 2028), each newborn American citizen with a Social Security number (and under age 18 in the year the account is established) can open an account.

 

The U.S. Treasury will provide the $1,000 seed money to a new custodial individual retirement account for our children. The investments must be in low-cost mutual or exchange-traded funds consisting of mostly U.S. equities. The money would grow tax-deferred with income taxes due only upon withdrawal.

 

At age 18, the child could access the account and empty it if so desired. There is an early distribution penalty for withdrawals before age 59 1/2 unless an exception applies, such as using the money for higher education or up to $10,000 for a first-time home purchase. Distributions can become more complicated depending on other factors, like who else is contributing to this Trump account.

 

Beyond the government's money, others will be able to contribute to this retirement fund. Parents, relatives, and friends can contribute up to $5,000 annually in after-tax money until the child turns 18 years old. That amount in contributions will increase if inflation rises. Employers can also contribute as much as $2,500 for an employee or an employee's dependent, and it will not be considered taxable income by the IRS. Charities can also contribute.

 

Last month, Democrats called out Treasury Secretary Scott Bessent for stating that these Trump accounts "are a back door for privatizing Social Security." I understood what he meant by that, but his words ventured a bit too close to the third rail of politics — Social Security. Critics feared that Bessent's suggestion could be an attempt to reduce the government's role in funding the nation's safety net program for retirees. Bessent quickly posted on social media that these accounts were not an "either-or question" and that the administration was committed to protecting Social Security.

 

However, the facts are that the future of Social Security, as presently constructed, cannot guarantee benefits for future generations. Young people know this, believe this, and have a great deal of anxiety over this fact. In my book, anything that provides Americans with an opportunity to build wealth as early as possible is key to a solution.

 

These accounts, according to tax experts, are projected to cost the federal government $15 billion over 10 years. This country needs to identify and promote alternative ways to finance Americans' retirement. What better way than to allow the power of compounding growth through investment to work for all Americans?

 

Those who say that people would be better off just contributing more to a traditional investment account on behalf of their children are missing the point. This program helps those with no savings, no traditional tax-deferred investment accounts, and no money or inclination to start one. They make up a large proportion of those who are fueling the populist movement in this country.

 

For the 50 percent or more of Americans that face this dilemma, this is an excellent way of ensuring future generations won't end up in the same situation. If I have any criticism of these accounts, I would have liked to see no early withdrawal loopholes. In addition, I had hoped that the age at which one could begin to withdraw funds would be later, or only at retirement age.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.