Why “Trump Accounts” May Be the Least Tax-Advantaged Option
Trump Accounts 2026: What Every Parent, Investor & Family Needs to Know Major new tax-advantaged savings accounts are now live, and they could significantly impact how families save for their children's future. In this informative interview, tax policy expert Adam Michel (Director of Tax Policy ...
Overview
Trump Accounts 2026: What Every Parent, Investor & Family Needs to Know Major new tax-advantaged savings accounts are now live, and they could significantly impact how families save for their children's future. In this informative interview, tax policy expert Adam Michel (Director of Tax Policy at the Cato Institute) joins the program to explain the new Trump Accounts that just launched, including the $1,000 government deposit, the hidden tax traps within the current rules, how it compares to traditional IRAs or 401(k)s, and what this means for the future of private savings.
Jeffrey Snyder, Broadcast Retirement Network
Joining me now is Adam Michel. He is the Director of Tax Policy at the Cato Institute. Adam, always great to see you.
Thanks for joining us on the program this morning. Thanks for having me on. So July 4th came and went, America 250, but it was also the launch of Trump accounts.
Before we get into the taxation, which I know your piece in the Wall Street Journal really focuses on, I wanna get your reaction to just the generality around Trump accounts. What do they mean? The potential impact, because obviously it just launched.
So what was your reaction to the launch?
Adam Michel, Director of Tax Policy, Cato Institute
Trump accounts are a good idea at their highest level. The idea here is that there's a tax advantage savings account that is set up for you at birth that your employers, that family, that friends, that parents, that charity can all contribute to on behalf of a child so that they can start saving at an early age. That is a tremendous goal.
There's also an additional piece of this particular program that over the next four years, the government will also put in $1,000 per child born through 2028. And so these accounts are then locked up until the child turns 18, and then there's some restrictions on their use after that, but then they turn into what basically is a traditional retirement savings account, an IRA.
Jeffrey Snyder, Broadcast Retirement Network
So I think, I'm not sitting in the policy discussions, but it sounds like you get the power of compounding. I mean, you can get a better timeline in terms of compounding, in terms of being born, and then having an account set up for you. And my parents were very good to me, but I wished I had something like that set up when I was a kid.
Let's talk about the taxation though, because I think there's some concerns that you and others may have. So there's a tax element to this. How does it kind of play out, and how is it different than, for example, a traditional 401k or an IRA type of program?
Adam Michel, Director of Tax Policy, Cato Institute
Yeah, so I said that the idea was admirable, that this is a good idea in concept. Unfortunately, Congress got the tax treatment of these accounts backwards, in my view. Unlike a, say, 529 plan, which is a tax-advantaged savings account for education purposes, which money goes in after tax from family members, and then is tax-free on the way out.
So all of the growth is exempt from the capital gains and dividends tax. A Trump account, money that goes in after tax, is still taxed on the way out. The growth is taxed actually worse than the normal capital gains rate, which is a lower rate.
It's taxed at the ordinary income tax rate. And so for savings beyond the government deposit, Trump accounts are actually the least tax-advantaged savings vehicle in the tax code. And so that makes them not all of that useful for most Americans.
Jeffrey Snyder, Broadcast Retirement Network
So you get, you know, I can see the value upfront. You get to contribute immediately when a child is born. You get the government component, at least for four years, as you mentioned.
And that's a good start. But then is the thinking that maybe you roll this over, or can you roll this over into your 401k, or an IRA, or another tax-deferred vehicle to kind of defer, further defer those taxes? You know, because today you can do that with an IRA or another qualified plan.
You can roll it into the qualified plan. So is that something that is portable enough that you can move to kind of take advantage of those plans, but also defer some of those taxes? Or is it just the tax that's gonna happen regardless?
Adam Michel, Director of Tax Policy, Cato Institute
Both are true. So at 18, the Trump account becomes a traditional IRA, but still faces this higher tax burden on the gains that were put into the Trump account. You can roll the traditional IRA, once it becomes that at 18, into a Roth IRA.
This is a Roth conversion. And this can be a tax-advantaged strategy for using these accounts. If you are sophisticated enough to plan that out for either as the 18-year-old, or because your family helped you, you still have to pay taxes at that conversion.
And this is the sort of the best way to use Trump accounts. But it requires some sophistication. And my concern is, or my broader point just asks, why are we making Americans go through, jump through these complicated hoops?
I would have much rather Congress set up a more straightforward vehicle that was tax-advantaged for everyone without having to do sort of complex tax planning strategies.
Jeffrey Snyder, Broadcast Retirement Network
You raise a really important issue. And a lot of Americans, from what I have seen in the literature and the research, is they don't engage with a financial planner or a financial advisor. Maybe that will change over the next 18 years.
I mean, we've got AI coming online. But let's talk about, I think you make a good point. And look, no, I wanna put out there, no bill is ever perfect and there's always opportunities to correct things or no regulation's perfect either.
So there's opportunities to come back. Do you foresee, I mean, Congress obviously has a lot on its plate now with social security, but do you see them maybe coming back in the near future to kind of clean this up? Clean it up is my word, clean this up?
Adam Michel, Director of Tax Policy, Cato Institute
Yes, I think there's a tremendous opportunity for reform to these accounts going forward. Because the $1,000 government deposit expires in a few short years, Congress will have to come back or they'll feel like they need to come back and reassess these accounts. And that will be a good opportunity to make some reforms.
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And in my view, the one reform that they need to do is relatively simple. All they need to do is just allow a deduction for parents' contributions that go into these accounts so that they are not taxed on the way in and then taxed on the way out. And that treats it just like a traditional 401k, a traditional IRA, and it gets the tax treatment right and actually gives parents a tax advantage, a tax incentive to save for their children's future in these accounts that are accessible early in life and gives you the advantage of compounding that you were mentioning.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, I mean, it's almost like the saver's credit that a lot of people aren't aware of, right? I mean, you put money where you can actually take the deductions, maybe something similar. In terms of like the timing, obviously there's been a lot of talk in recent weeks about the Society Trust.
But I mean, would you expect, I mean, Congress can chew gum and walk at the same time, so it can do multiple things at once. Given that this is an election year, do you think that one gets the priority over the other or can they, maybe after the election is done and the Congress is settled, they can, I'm asking you to kind of crystal ball, but I mean, can they do both at the same time, I guess? Let me put it that way.
Adam Michel, Director of Tax Policy, Cato Institute
They certainly can do both at the same time if they want to. I suspect that this Trump account deadline will come before they really get serious about social security. I do think the two conversations can be tied at least rhetorically.
Have you already seen this from Republicans that the goal should be allow Americans to save for their own future, rather than the sort of heavy hand of the government getting involved, which is what social security is. Social security is a forced savings program. So to the extent that we can help set more Americans up to save their own resources for retirement, maybe that can make social security reform a little bit easier.
Although there's no explicit tie between these programs. And so the sort of making that tie more explicit would help with the reform agenda of the broader private retirement savings sort of ecosystem.
Jeffrey Snyder, Broadcast Retirement Network
You know, I think you brought this up, but I'll just put it out there again. I think there's a lot of different options out there. You mentioned 529, you mentioned Trump accounts, you mentioned IRA, or I mentioned IRAs, 401ks, et cetera.
I think it's difficult, I wanna get your sense for this, for the real American. I mean, they wanna save. I have no doubt in my mind that if you talk to anybody on the street, they wanna save.
They know they have to save. They know they need to have a financial future for themselves and be independent. But you know, it's like going to 31 Flavors or what was Baskin-Robbins.
You know, it's hard to pick just one flavor. Do we need more education around all these programs more broadly? I don't know if that education comes from government or the private sector or both, but it just seems like there's so many options out there.
It's hard to pick just one flavor.
Adam Michel, Director of Tax Policy, Cato Institute
That's exactly right. There's more than a dozen of these tax-preferred specialty savings accounts in the tax code. And that's the problem itself, is the complexity that comes with all of these different rules and restrictions, what the money can be spent on, et cetera.
And so the answer in my mind is simplification. We need, instead of rolling Trump accounts into say an IRA, a retirement vehicle, they should roll into a universal savings account, something without as many rules and restrictions. These accounts have been tried and are quite successful in Canada and the UK, where money goes in and then can come out if it's tax advantage, but money can come out whenever someone needs it and can be spent on whatever goals that they have in their life at that time without the government getting involved.
And so a sort of universal savings account without these restrictions could supersede all of the complexity that's going on underneath the surface so that you have a sort of one-stop shop place where Americans can save. And you're not scared away from locking up your money until retirement if you're young, or if you're lower income, you might lose your job and you need to access your savings. A universal account without all of the complexity gives people that flexibility that they need and meets them where they are.
Jeffrey Snyder, Broadcast Retirement Network
I like that, and this is something that we didn't, it wasn't in your article, but I like that you bring up Canada and lessons to be learned from other systems because there are a lot of different types of systems around the globe. One system in particular that I wanted to bring up and just get your opinion on, and I'm not gonna ask you about the specifics, but the superannuation plan was just brought up. I think the president, when they were launching the Trump accounts, talked about maybe further improving.
Is this an example where maybe you look abroad to Australia and maybe they've got some things right that we can kind of bring into the United States system to further strengthen what we're doing? Because look, we are a more perfect union, but we're not perfect. So there's lessons to be learned from elsewhere.
Adam Michel, Director of Tax Policy, Cato Institute
Yes, I think there is a lot to be learned from countries all around the world. I'm more of a fan of a private account system where Americans still control their money themselves, where the superannuation example you gave there is still a compulsory savings program. The government is still heavily involved.
And I think what we've learned from Social Security is when politicians are involved with protecting your savings, they don't actually protect it very well. But instead they over-promise and under-deliver and set people up for facing the crisis that Social Security has in front of us. And so I'm much more bullish on the American people saving for their future.
And that's where I think something like a universal savings account or a more flexible, cleaned up version of Trump accounts could be part of the answer to allowing Americans to set themselves up for a future of secure retirement or whatever their savings goals might be.
Jeffrey Snyder, Broadcast Retirement Network
Yeah, really, look, I think well said. I would probably agree with you. And I know what I need to do better than somebody else who maybe thinks they know what they need to be.
But anyway, hopefully, as you say, the Congress takes a lesson from what you've articulated in the Wall Street Journal article. They come to terms and they're able to kind of clean this up because we don't want to disincentivize savings. We want to have people save more.
Adam, it's great to see you. Thanks so much for joining us. And we look forward to having you back on the program again very soon, sir.
Adam Michel, Director of Tax Policy, Cato Institute
Thanks for having me on.
Source
Originally published at www.thestreet.com.
