Yves here. News you can use, here on many deficiencies of the Trump Account scheme. There are better ways to save for college.
By Dean Baker, the co-founder and the senior economist of the Center for Economic and Policy Research. He is the author of several books, including “Getting Back to Full Employment: A Better bargain for Working People,” “The End of Loser Liberalism: Making Markets Progressive,” “The United States Since 1980,” “Social Security: The Phony Crisis” (with Mark Weisbrot), and “The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.” He also has a blog, “Beat the Press,” where he discusses the media’s coverage of economic issues. Originally published at Common Dreams
I’m serious, and this is not just my disgust with everything Trump. There is no good reason for the overwhelming majority of people in the country to ever put a dollar in a Trump account for their kids.
To be clear, I’m not in favor of tax-sheltered accounts in general. They strike me mostly as a very inefficient way to accomplish public goals, in this case making education more affordable. The more efficient route would be to have more public funds go to support public colleges and community colleges.
The tax-sheltered account route also favors higher-income people. Over a quarter of households owe no income tax, meaning they would get no benefit whatsoever from putting money in a tax-sheltered account. Another 20 percent are in the 10 percent bracket, meaning the account would just save them just 10 cents on every dollar invested. By contrast, the highest income households save 37 cents on every dollar invested in a tax-sheltered account.
In addition, tax-sheltered accounts put a lot of money in the hands of the financial industry. Tens of billions of dollars go to the people and companies who administer these accounts, creating a pointless layer of wasteful bureaucracy.
To be fair, the Trump accounts limit fees to 0.1 percent of assets, far lower than is charged by many accounts. This is an important point. People can get low-cost funds in other accounts also. Stock index funds generally have the lowest fees, and most people would be wise to take advantage of them. People will tell you that they will beat the market, but most won’t, and you’ll just end up wasting money in higher fees and trading costs.
But that has nothing to do with individuals’ decisions on where to put their money. For better or worse, Trump accounts exist. The question is whether people will be helping their kids by putting money into them. And, as I said above, the answer for almost everyone is no.
The main reason is that we already have 529 accounts for the purpose of saving for a kid’s education. The big difference between the accounts for this purpose is that it is possible to withdraw money from a 529 account, if it’s needed, where it is not possible to withdraw money from a Trump account for any reason, until the kid turns 18.
People do pay a penalty for taking money out of a 529 early, but at least they can have access to it if they need it. And unexpected events do happen. People can lose a job, have serious medical expenses, or get divorced. These and other unanticipated situations can require people to dip into whatever savings they have. With a 529 plan, they can use the money if they really need it. With a Trump account, they are out of luck.
It is important to recognize that withdrawals for non-education purposes are fairly common. A recent study by Vanguard found that 2 percent of accounts had an unqualified withdrawal in an average year. If an account is open on average for 20 years, this would mean that 40 percent of accounts have an unqualified withdrawal. People don’t expect bad things to happen, but they do.
Also, since the penalty is based only on the earnings portion of the 529 plan, not the whole sum in the plan, in most cases it is likely to be small. Suppose someone pulls $5K out of a 529 plan, where earnings are currently 40 percent of the money in the plan. That means they would pay taxes on $2,000, plus a penalty of 10 percent. If they are in the 10 percent bracket, their taxes would be $200, and their penalty would $200. If they were in the zero bracket, say because they had lost their job, they would only pay the $200 penalty. That compares to being unable to touch their money at all in a Trump account. (The money in a 529 is not taxable at all if used for educational purposes. The earnings in a Trump account are taxable.)
It’s also worth mentioning that it’s not even possible to change asset allocations in a Trump account. Suppose your kid is 17, one year too young to make a withdrawal. If you’re worried there is an AI bubble likely to burst, and you would rather have your money in Treasury bonds, you’re out of luck. Trump accounts won’t let you make the switch; you have to go down with Elon Musk and the rest of the market.
The silliest argument given by proponents of Trump accounts is that they can be rolled over into an IRA to allow for lifelong wealth accumulation. So can the money in 529 accounts, up to a ceiling of $35,000.
The Trump gang makes a big issue of the $35,000 ceiling, but this is something only elite types with lots of money would care about. Very few people ever accumulate more than $35,000 in a 529 account, and the vast majority of people who do will find some education-related expense that would reduce the value of the account to less than $35,000. Remember, even food and housing can count as education-related expenses.
But let’s say someone ends up with an amount over $35,000 that they can’t use for education-related expenses. Suppose they have $40,000 that they want to roll over into an IRA. In this situation they would have to pay a 10 percent penalty on the amount over $35,000. That would be $500 on the $5,000 difference.
They would also have to pay taxes on the $5,000. The beneficiary is the one receiving the money, so they would be paying the tax. Since they are just beginning their working career, they likely have a relatively low income. This means they will almost certainly be in the 10 percent or 15 percent tax bracket, and quite possibly the zero bracket.
So, this is the bad scenario that Trump account proponents say it is important to avoid, and therefore skip a 529 and put your money in a Trump account instead? That seems pretty whacky, and why you need to fire your financial adviser if they suggest putting money in a Trump account.
To be clear, take the $1K that Trump wants to give newborn kids. It would be a much better use of tax dollars if we provided food and medical care to kids from low-income families than giving out $1K checks to millions of families that don’t need it. But you aren’t going to change the policy by turning down the money. If it bothers you, donate the money to a good cause, but do take the money and don’t ever put another penny in a Trump account.
So I’m reading this article thinking it’s kind of nuts telling people not to take a free $1,000 (if your child is born from 2025-2028… if your child is older, too bad), but then he finally saves that tidbit (take the seed money) for the last paragraph.
Yves is a she. My daughter was born in 2012 so sadly not eligible for the $1000. Not sure about Gwynne Shotwell’s SpaceX stock.
Yves is a she, yes. But the author in question here is Dean Baker, not a she so far.
This comment is a reading comprehension fail. The article clearly argues for taking the $1,000 but not adding any new funds.
Trump accounts are advertised by the IRS as a new type of retirement account – not a primarily college spending account. Separate it in your mind from a 529 and perhaps you’ll find it slightly less useless. It allows 18 years of savings/compounding in a slightly tax advantaged account without earned income. What I do agree with though…. “Fire Any Financial Advisor”.
This is Making Shit Up or IRS misrepresentation.
First, there are two parties involved, the parent that funds it and the kid as beneficiary.
Second, there is the inability to change asset allocations.
Third, there is the inability to withdraw before the child is 18, while with an IRA you can withdraw if you pay the taxes OR borrow every year for up to two months by taking the cash out and then rolling it into a new IRA before the rollover period expires.
So not at all like an IRA.
Dean Baker is my 2nd favorite economist behind Michael Hudson.
Trump, if nothing else, is a master at putting his name on stuff, although they are normally inefficient, bad, ugly or a dismal failure.
He also knows there’s a good 20-30m suckers that would do whatever he says. So my question is – what does he or his family gain from these accounts? Do they get a piece somehow?
Dean mentions it midway through the article:
If Musk or others want to cash out their overvalued assets, they need someone else to buy it. By providing $1000 per account to 20 million potential new accounts, the US Treasury is basically facilitating up to $20 billion in stock purchases, allowing those currently holding the bag to pass off $20 billion of their own stocks at the inflated price before selling pressure causes those stock prices to fall.
Not mentioned in the article is the fact that Trump accounts have provisions to allow employers to provide tax free matching of family contributions, up to the maximum annual contribution amount of $5000 per year. This means the potential for dumping before price pressure could go as high as $100 billion per year, funneling taxpayer, public, and corporate money into exits for insiders.
Given the election for funds only needs to happen before a child turns 18, and the $1000 bonus seed fund is applicable until December 31, 2028, I plan to wait until elections show Republicans losing power by that time, and a stock market correction has already happened before enrolling my own newborns for that money, and certainly not contributing another penny or taking up any private donation schemes. Even if I lose out on two to three years of compounding growth, I anticipate any correction will either make those years a wash, or worse off than delaying and eating the inflation and lack of growth for the $1000.
Another odd thing about the accounts is that you can only invest in stock funds. No money market or high interest money funds which seems restrictive especially as you get close to 18. This link shows the Treasury Department’s list of 5 eligible funds (eventually…):
https://home.treasury.gov/news/press-releases/sb0551
From the press release: “At launch, all contributions to Trump Accounts will be invested in the State Street SPDR Portfolio S&P 500 ETF (SPYM)…. In the coming months, Treasury expects to make available functionality that will allow parents or guardians to choose how to allocate funds across the additional investment options. Until that functionality is available, all contributions will remain invested in the default fund.”
And as much as I loathe Trump, the cost of Trump Accounts isn’t that much. It was clever in that there are about 3M births each year in the U.S., so the seed money is only $3B per year. It’s pukeworthy that our narcissist-in-chief named it for himself, and naturally the IRS form to sign up for Trump accounts is IRS Form 4547.
And we always have to be wary of any programs that threaten or at least encroach upon Social Security.
As with most articles hosted on Naked Capitalism I really appreciate the heads up. If anyone I knows starts considering a Trump account I will send them your way!
In spite of not being a statistician (and thus being a bit concerned that I may have gotten something wrong) I do want to quibble with one bit of math:
>”A recent study by Vanguard found that 2 percent of accounts had an unqualified withdrawal in an average year. If an account is open on average for 20 years, this would mean that 40 percent of accounts have an unqualified withdrawal.”
But one account can have more than one unqualified withdrawal, can’t it? And if an account had one unqualified withdrawal, would it be more likely to have another? How many unqualified withdrawals close the account and how many keep going, only to have a second or third unqualified withdrawal years later?
So it seems to me that there is too much uncertainty to make the calculation Dean Baker wants to make.
But even if we treat the occurance of an unqualified withdrawal as totally random, I believe Baker’s math is wrong. I believe that his calculation was that a 2% chance per year over 20 years is 2%*20=40%. But that would mean that a 2% chance per year over 60 years implies a 120% chance of the thing happening, which is impossible.
I think the math used for a situation like this to determine the chance that the event will NOT occur at least once would be (100%-2%)^20=66.8%. Thus the chance that the event occurs at least once for one account in 20 years would be 100%-66.8%=33.2%.
This in no way challenges any of the points that Baker made. The 2% per year figure still stands (or at least this in no way contradicts it).
In other news, the roll out for 530 accounts was totally a cluster and is now worse.
The administration, in another complete disregard for agreements and contracts, decided to just disregard who knows how many sign-ups from one .gov URL which is explained on a sketchy and I believe illegal .com site.
Foster children are out in the cold. Unless you count a web page “under construction” as a savings plan.
Scams Spam is rampant and the Treasury is warning people not to respond to emails about Trump accounts. While the administration says families who use the .gov site will recieve and email explaing what to do next, and this email has issues too.
Ain’t we got fun.