Saving for a child’s future is an important part of every parent’s financial plan, but for many, the task can be daunting.
According to a recent LendingTree study*, raising a child to adulthood costs around $300,000. And this total excludes college costs, job training, or future expenses your kid may need.
That’s where the “MAGA Account” enters the fray.
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Introduced in the latest “One Big Beautiful Bill” proposal from the U.S. House Ways and Means Committee, so-called MAGA savings accounts would allow parents, relatives, and others to contribute $5,000 annually for a child’s future educational, homeownership, and entrepreneurial expenses.
The federal government would seed this tax-advantaged account with $1,000.
The savings would grow “exempt from taxation” (more on that below) until the child reaches 18. By then, there could be tens of thousands of invested dollars for your child’s use.
Sen. Ted Cruz (R-TX), who proposed the savings account initiative, told Semafor, “There are many Americans who don’t own stocks or bonds, are not invested in the market, and may not feel particularly invested in the American free enterprise system. [MAGA accounts] will give everyone a stake.”
But if the savings account idea sounds familiar, that’s because it is. Democrats have proposed so-called “baby bonds” in the past, which would also offer $1,000 seed money to eligible children, but failed to gain bipartisan support.
So, how is a “MAGA account” any different? And should you open one if this tax provision becomes law?
Read on.
*Note: LendingTree researchers used various data sources, incorporating multiple expenses related to rent, food, health insurance, etc., to calculate the cost of raising a small child in a two-income household.
Proposed ‘MAGA Account’ could put $1,000 in every newborn’s name
Under the new tax bill, the House GOP wants to create “Money Accounts for Growth and Advancement,” also known as “MAGA accounts,” for kids under eight.
Overseen by the Department of the Treasury, these proposed savings accounts are touted by supporters as a new way to help pay for higher education, homeownership, and any entrepreneurship expenses that account holders may incur.
If the provision becomes law, supporters say eligible children could have an account opened for them as early as January 1, 2026.
Generally speaking, parents would open the account through a bank or other financial institution, though others could open your child’s account for you (more on that below).
MAGA savings account eligibility
To be eligible for the proposed “MAGA Account,” qualifying children would need to be:
- Born before January 1, 2024,
- Under eight years old,
- U.S. citizens, and
- Have at least one parent with a valid Social Security number (the SSN provided has to be work-eligible).
How to contribute to a ‘MAGA’ savings account
Several individuals might contribute to a child’s savings if the MAGA account tax provision becomes law, including:
- Parents
- The child’s other relatives
- Governmental, non-profit, and other taxable entities
Each of the above entities would be able to contribute up to $5,000 of after-tax dollars annually to a MAGA account. However, there is a catch: Contributions couldn’t be made into a MAGA account after the child reaches 18.
MAGA account distributions for qualified expenses
Certain rules would govern MAGA account distributions depending on the account holder’s age:
- No distributions would be allowed until the child reaches 18.
- After that, account holders could only access up to 50% of their funds for higher education, training programs, small business loans, and first-time home purchases.
- At age 25, savings account holders could withdraw up to the full balance of the account, but only for the aforementioned limited purposes.
- Upon reaching 30, account holders could access the full balance for any purpose desired.
Distributions taken for “qualified purposes” would be taxed as long-term capital gains, which is generally a much lower tax rate than ordinary income. However, if the distributions are not “qualified,” they might be taxed at the ordinary federal income tax bracket instead.
Would ‘MAGA’ accounts get taxed?
While the 389-page House plan states that MAGA accounts would be “exempt from taxation,” the House Ways and Means 47-page bill summary suggests that contributions would be made with “after-tax dollars” and that distributions would be taxed at “long-term capital gains” or the “ordinary income tax rate,” depending on whether the expense is qualified or not.
So what does that all mean?
Well, contributions and distributions into a MAGA account would be taxable.
However, since these savings account funds must be invested in a “diversified fund that tracks an established index of U.S. equities,” each account would accrue interest, a fact that neither of the MAGA tax provisions mentions.
So, if the initial bill’s statement that MAGA accounts are “exempt from taxation” is true, perhaps the interest accrued wouldn’t be taxable.
But the tax provision would need further details before the final taxability of the MAGA accounts could be determined. And keep in mind, this is merely a proposal, and the bill as written in the House of Representatives has a long way to go before any of its provisions become law.
MAGA Account pilot program: Is it worth it?
Under the MAGA pilot program, each U.S. citizen born between January 1, 2024, and December 31, 2028, would be eligible to receive $1,000 in their MAGA account.
Because account holders would start with seed money from the federal government, the pilot program would have stricter eligibility requirements:
- Both parents would have to have a valid Social Security number (SSN) that is work-eligible.
- For newborns, only parents or guardians could open a MAGA account for their child.
But you might not need to worry about opening a MAGA account, as the federal government could open one for you.
The House Ways and Means tax bill states the following: “If the Secretary of the Treasury determines that an eligible individual does not have an account opened for them….The Secretary shall establish an account on the child’s behalf.”
Although parents might opt out of the account after the fact, some problems could arise from opening millions of accounts on behalf of newborns.
The new House GOP tax bill includes a provision for a kids’ savings account known as a “MAGA account.”
(Image credit: Getty Images)
What’s wrong with the MAGA account proposal?
In an interview with CNBC, Sen. Cruz remarked, “[A MAGA account] is essentially a 401(k) for every newborn in America, and just like with 401(k)s, employers have seen it as a very attractive benefit for their employees to match or help seed those savings accounts.”
But placing $1,000 into three million accounts annually without definitive participation from participants could be problematic.
Take, for example, retirement savings accounts. According to USA Today, about 25% of 401(k) accounts are forgotten, amounting to $1.65 trillion in unclaimed assets across the U.S. And although retirement accounts and MAGA savings accounts could be seen as similar, a big difference between them is how they’re funded.
MAGA pilot program accounts would be initially funded with $1,000 federal seed money. That would most likely come from taxpayer dollars. So if the funds aren’t used, that might amount to millions in tax dollars sitting idle as other areas of the federal government are strapped for cash.
As the bill undergoes revisions and Congressional debate in the coming weeks, privacy concerns may arise regarding the federal government’s ability to open a financial account in a child’s name without parental permission.
Child savings accounts aren’t new
While there may be kinks to work out with the proposed MAGA savings accounts, it’s important to note that the idea behind the accounts isn’t the first of its kind.
Democrats have also pitched a similar notion about seven years ago, when Sen. Cory Booker (D-NJ) proposed the creation of a savings account “baby bonds,” with $1,000 seed money for newborns.
At the time Booker posted on then-Twitter, now X: “We need to close the wealth gap and give every child born in the U.S. a fair shot at the American Dream — my baby bonds proposal is a clear path.”
However, as mentioned, Sen. Booker’s proposal struggled to gain bipartisan support.
There are also several key differences between a proposed MAGA account vs. the baby bonds that Booker proposed:
- While MAGA accounts would be contributor-funded, Booker’s baby bonds would be funded by the federal government.
- Under Booker’s proposal, contributions would be made based on family income, with potentially larger initial deposits for lower-income families, while MAGA accounts rely more on “who you know.”
- The baby bonds idea was designed to “substantially close the racial wealth gap,” while the MAGA accounts would be formulated to “help produce new capitalists,” according to Sen. Cruz.
“[Booker’s proposal] is just a government program,” Cruz told Semafor in his interview, “Where this [MAGA account] is very much designed to get the next generation to invest in the market.”
While certainly a surprise in the House GOP tax bill, the “MAGA account” provisions could face challenges or find support in the coming days. The House GOP plan passed out of the House Ways and Means Committee and will now go to the House Budget Committee.
Stay tuned for more updates.
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