Will Trump Accounts Actually Help Families Save?

Who are Trump Accounts really for, and will they actually help families save? With yet another savings vehicle added to an already confusing system, do these accounts solve a real problem—or just add more complexity?

In this episode, we break down what Trump Accounts are, how they work, and why they might not be the game-changer they sound like. We also explore why the U.S. savings system is failing most Americans and what a simpler, universal approach could look like.

Transcript

Kyle Hulehan: 0:00

Hello and welcome to the Deduction of Tax Foundation podcast. I'm your host, Kyle Houlahan, and we are back with another episode today. we are joined by Alex Marsano, senior Policy Analyst at Tax Foundation. Alex, how you doing today?

Alex Muresianu: 0:12

Doing well, Kyle, how are you?

Kyle Hulehan: 0:13

I'm good. Are you getting tired of the one big, beautiful Bill? Are you excited to talk about stuff that relates to Where are you at right now?

Alex Muresianu: 0:20

Uh, I'd say, I know it's what I gotta do.

Kyle Hulehan: 0:26

Yeah. Fair enough. enough.

Alex Muresianu: 0:29

I.

Kyle Hulehan: 0:29

Okay, well let's dive in because today we have an interesting topic that a lot of people wanna know more about what's going on with the Trump accounts. what exactly are the Trump accounts and how do they fit into the one big, beautiful bill?

Alex Muresianu: 0:41

I think the first thing to say is they're a relatively small part of the one big beautiful bill, And just in terms of order of magnitude, the one big beautiful bill is about, four. Uh, trillion dollar, tax, cut even after factoring in, uh, you know, economic growth. Um, but a$4 trillion, of net tax cuts. And, you know, Trump accounts are, somewhere in the 10 to$20 billion range. So a, very small percentage of the bill. It's a relatively small policy. And within that. Subcategory and within the Trump accounts, it's really two policies. the first is these payments for children born between the beginning of 2025 and the end of 2028. these, payments of$1,000 will sit sort of protected in an account until at least, a kid turns 18. And we can get into the specifics of that later. So there's these direct payments. That are, held in these accounts. And there's also the option to, contribute to these accounts out of your own pocket or a third party, can contribute, to these accounts. they have, some tax advantages, relative to a brokerage account, but they're not particularly, uh, strongly tax advantaged. The Trump account is a combination of the direct payment, and that's sort of the exciting part. I think the part that has caught people's eye. but there's also the actual, account contribution, dynamics, which are, um, generally less generous than most other tax advantaged accounts.

Kyle Hulehan: 2:16

and we can probably get into this part here in this question'cause I wonder how long it might take for people to get that thousand dollars and when it would help them. But who are the Trump accounts really designed for and will they actually help families?

Alex Muresianu: 2:29

so I think there are a couple of. Dimensions to consider when asking who is this policy supposed to benefit? There are two arguments that I think people have brought forward to defend the Trump accounts or sell the idea of the Trump accounts. There is, on the one hand, the goal of. Supporting long-term, wealth building. the idea that, we'll put this money away. Uh, you can, you know, the account managers, you know, the, the. Parents, uh, you know, can invest the money in this account and it'll grow and kids will be able to access those funds when they become an adult or, longer or, they can even keep them in that account for a very long time. And the power of compound interest, you know, build financial security, uh, for them. But then the other side of the argument is that it is a policy for families and for, incentivizing, you know, um. Uh, more kids, uh, and, and supporting, families more. at least on the, latter perspective, I think if you're gonna design a policy for helping kids, it would make more sense to focus that, policy on immediate sort of benefits. You know, the, the transition of having, kids, you know, for the first time. Uh, that is a sort of, much more important point. Where you'd need, additional sort of financial support, then, then once, the kids turn 18. it's not really an ideal policy for supporting families or supporting children or young families. As far as long-term wealth building, I mean, certainly the government contribution of a thousand dollars, I mean, that's notable. and that's a reason to try and keep track of this account, Ultimately, there are a lot of accounts that already exist with different eligibility requirements and, restrictions, on how the funds are used or accessed. That the ability to contribute to a Trump account is not much of an improvement over the status quo, and it is a move towards sort of a, a complexity through another sort of tax advantaged account rather than a simplification to make these programs more accessible.

Kyle Hulehan: 4:43

You know, we're, we're both younger here and probably newer to all the retirement savings, all of the accounts you have to use, so it is confusing. There is currently. 11 existing tax advantage saving vehicles and, and, and Trump accounts are just sort of adding to that already confusing system and, and we're throwing up a, a table here that shows the savings vehicle and it's confusing. Could you just kind of, you know, break it down for us a little bit, like what are these accounts and what's going on with them?

Alex Muresianu: 5:10

the biggest, tax advantaged accounts, are the retirement, accounts, you can have traditional retirement plans, or sort of Roth style, retirement plans. some are the. Sort of workplace 401k, where you have, you know, they're sort of done through your employer. And then you can have in there are individual ones, uh, as well. But the idea here is, is basically these accounts have one layer of tax, traditional style you contribute. Money and those contributions are deductible. and then the withdraws when you retire and they're only sort of fully accessible without a penalty when you retire, are taxable. then there are the Roth style. retirement accounts where your contributions are taxed as part of your income. but when you withdraw money, that money is tax free when you retire. in both cases there are some specific, uh, qualified expenses that allow you to withdraw. Money, but general rules, you're not allowed to access these funds, until 59 and a half. then there are several other, tax advantage savings accounts of various kinds. it's useful to think in terms of those two categories of is the, are the withdrawals taxed or are the, um, uh, contributions taxed? With Roth and traditional 4 0 1 Ks, only one is taxed. In Roth's case, the contributions are taxed in the traditional case, the, distributions are taxed. there are several other accounts that. Some of which have exemptions on both sides, like, health savings accounts, others, uh, Trump accounts sort of best fitting this, although there are some, uh, uh, exceptions don't have, uh, uh, deductions for contributions or, full tax exemptions for withdrawals. you do have. this sort of tax deferral idea where if you have investments, in the account, it's sort of shielded, uh, and you don't have to, so index funds or, or funds like that, sometimes payout. dividends are, are capital gains, very various kinds. you can sell in index fund and repurchase it, and as long as the money stays in the account, there's a tax deferral. It doesn't trigger tax liability if you make those transactions. it's a tax benefit relative to a brokerage account, but it's generally not as powerful as the, deduction, or exemption for contributions or, or withdrawals.

Kyle Hulehan: 7:40

so with all of these different accounts, the Trump account is really just sort of to a complex system and a confusing system and not really providing something new for Americans.

Alex Muresianu: 7:53

Yeah, I mean, I think the main new thing is the thousand dollars from Uncle Sam. I think that is. Really the differentiating factor and maybe there's a case one could make that by making this contribution from the government people are more likely to utilize the account for other contributions to save more. but you know, if, so that's a roundabout way, to do it. A very poor sort of half solution where if. Savings accounts are complicated and have a lot of restrictions or eligibility requirements. it seems like an expensive solution to that problem, to put money in another one of these accounts just to get people to use them. the better option would be simplifying the collection of savings accounts we have today into ones that are, fewer, and More, accessible and easier to follow.

Kyle Hulehan: 8:41

I'm gonna follow up, uh, with this is I often say here that I am. a little bit confused by the tax system and a little bit confused by all the savings systems as a younger person trying to save for retirement, I know that this is your job, but have you found it confusing at all?

Alex Muresianu: 8:56

Sure. Yeah. No, I, I, I think there are some things where I'm fairly certain that. I, you know, there, there might be some extra benefit in one of those type, some certain type of account, for me to set up. But it's like. What is the added benefit of setting up, a fourth different type of savings account versus how much time I'm gonna spend having to spend to, to set up, that account and manage it and remember that I've gotta keep track of it. how much is the payoff there? And usually, I mean, not every case, but, um, usually I say, ah, that, that doesn't really feel like it's worth my time. I might be unusual in, in other aspects of finding tax interesting. But generally I don't like having to keep track of, 15 different financial institutions. somebody who is perhaps on paper rationally maximizing their, their, tax, treatment mice.

Kyle Hulehan: 9:47

I completely understand that. I feel like I'm in the same boat. it's hard to keep track of all of it. let's talk about maybe some solutions here. What could be better, if we could redesign the saving system from scratch, what would a simpler, more effective approach look like? are there any other countries or places that we could model this after?

Alex Muresianu: 10:06

So the big picture, structural fix. If you were redesigning the income tax from scratch, what would you do? Well, the current income tax, for the most part, with the exception of some retirement accounts is you earn income and you are taxed on that income. Now, if you go out and spend. That income you do not face an extra layer of tax, at the federal level. But if you save that income and invest it and then it grows and you sell, your investments, to consume, say five, 10 years in the future, you are taxed again. The income that you decide to consume, you spend on, pies. I think of consumption. I think of someone eating a pie. uh, you only face one level of tax, but if you, decide to save that money and invest it, and in the future buy a pie, you end up paying taxes twice. So the. Sort of broad structural fix if you were, redesigning the income tax from scratch would be to, have a system where effectively all saving would be deductible. Um. When you first earn income, if you put money away, you deduct that from your income tax liability. in the future, when you decide to take those savings out to consume, you pay taxes, on them, this would create effective tax neutrality between consuming and saving your income. that is the like big picture, structural fix. now the improvement on the sort of current system where we're accepting the, the, the premises of, of roughly the current income tax, would be introducing a Universal savings account, you could imagine it working like a Roth or a traditional, retirement account. but basically instead of a, retirement account where you have this savings and consumption neutrality where you have, you know, only one layer of tax on saving, But it's restricted. and you can only withdraw money from these retirement accounts when you're retired without facing a penalty. With the Universal Savings account, you can access that tax treatment immediately, for any purpose, not just retirement. a good example might be saving for, a house or an emergency fund for, major expenses. You know, major variable expenses. Like, medical expenses. we have. health savings accounts and health savings accounts actually have among the most, generous, tax treatment, because they have exemptions for both contributions and withdrawals. But they're restricted, they're restricted to qualified medical expenses or qualified healthcare expenses. the idea of a universal savings account is that it would be accessible. At a shorter timeframe than a retirement account. it would cover all manner. And, and we'd be able to access it for all manners of, of expenses, on an immediate term, or a, you know, shorter timeframe than, than until retirement, than after retirement. and it would also not be restricted by different categories of, of expenses, which, which many, or most of the, other saving accounts are.

Kyle Hulehan: 13:10

And like a, like a Roth IRA or a 401k or some of those things, it earns money on the stock market. is that how that works? Right.

Alex Muresianu: 13:19

yes, you can invest the, contributions to, a Universal savings account.

Kyle Hulehan: 13:23

Are there any cases or any countries that we could, follow up in terms of like, how is this successful? Has it helped low income folks? what have we seen there?

Alex Muresianu: 13:30

Yeah, so there actually has been, a few examples of, universal savings accounts in practice in, countries that we think of as relatively similar to the United States, Canada and the United Kingdom have introduced versions of universal savings accounts recently, and have seen quite good uptake, of them, especially relative to some of these savings accounts we have for more specific purposes in the United States. And that's particularly true at lower income levels where if you have, you know, you're able to save some money, not much, but some, and on top of, making your everyday expenses you're able to save some money, but you. are not financially stable or comfortable enough to be confident to put it away in a individual retirement account, where it is effectively sort of locked away And you also might not want to put those savings into, a health savings account or other specialized savings account where it's restricted for a specific purpose. you want to be able to save and invest and have the tax benefits of a neutral savings account where there's tax only on one level of saving or, or one level of consumption, you want to be able to have access to that fair tax treatment. But, you don't wanna lock yourself in to any one type of expense or do you don't want to lock that money away. Until retirement. and so a universal savings account makes the tax treatment, the neutral tax treatment between savings and consumption accessible. but it it also allows for much more flexibility. And, simplicity as well. it would make sense to replace a lot of the existing savings accounts with something like a Universal Savings account. the uptake would likely be higher among, lower income households, and would also be easier to comply with and manage.

Kyle Hulehan: 15:24

I gotta say as someone who is not trying to keep track of all of these accounts, I personally would love something like this that would be a little bit more simple, a little bit more streamlined, and I think it's something that honestly, I think everybody could get on board with. Who doesn't want. Their, their savings simplified. I, I feel like this is kind of a, left, right? Like we can come together on is there anything else that you feel like you need to get off your chest about Trump accounts?

Alex Muresianu: 15:50

Well, I mean, uh, I, I think this was, this was a real missed opportunity, not only on a policy level, but you want to talk about, catchy, patriotic branding, which we have, Trump accounts or MAGA accounts, which are rah rah, but have a certain political valence, who couldn't get on board with a USA.

Kyle Hulehan: 16:07

That's true. account. USA baby.

Alex Muresianu: 16:09

yeah.

Kyle Hulehan: 16:10

They missed. Ugh, dude.

Alex Muresianu: 16:12

Very disappointing.

Kyle Hulehan: 16:13

terrible. Yeah. It was a good chance. And July 4th, I mean

Alex Muresianu: 16:17

it would've, yeah. USA is on, you know, 1776. America is made, USA is made,

Kyle Hulehan: 16:26

We did it.

Alex Muresianu: 16:26

could have been July 4th, 2025 USAs are made. That was a missed opportunity.

Kyle Hulehan: 16:31

Yeah. It really was. Well, Alex, thank you for being on the show today. Thank you for breaking this down with us. And before we sign off, if you have any burning questions, on taxes, you can send them our way. You can drop a comment on YouTube and you can email us at podcast@taxfoundation.org. You can slide into our dms at Deduction Pod on Twitter. Thanks for listening.