I Fixed the Trump Account App
It shows the power of compounding growth, but omits the tax burden.
I recently downloaded the Trump Account app and completed the final steps to claim the “free” $1,000 government handout on my son’s behalf.
The app prominently features a tool to estimate the account’s value based on parental contributions, and it pushes people to “make a contribution” by starting “with as little as $1.”
The problem—as I’ve described in the Wall Street Journal and in a much more detailed Cato Policy Analysis—is that the growth can happen in any investment account; it’s the tax treatment that matters.
Nowhere on the future-value page does it say the government will tax you on the gains as ordinary income. You have to dig deep into the app to find this information. It also doesn’t say there are likely other investment accounts where the after-tax value of your deposits could be higher.
By leaving out the tax treatment, the app is misleading. The gain on money withdrawn from a Trump Account is taxed as ordinary income (the rate on your paycheck). The same gains on an after-tax contribution made to a 529 plan and spent on college are tax-free. Gains in a taxable brokerage account face the lower long-term capital gains rate. That rate could be zero for lower-income Americans.
In an apples-to-apples comparison, Trump Accounts are one of the least tax-advantaged ways to save for your kid’s future. By pushing people to put their own after-tax money into Trump Accounts, the app will very likely make some Americans worse off.
So, while watching Argentina eke out a win over Egypt in the World Cup, I vibe-coded a fix for the Trump Account app’s core defect. (If you see anything amiss, let me know.)
The widget below makes the same assumptions as the Trump Account app, but it adds the tax effect, along with a side-by-side comparison with a 529 plan and a taxable brokerage account. For identical contributions, spent on qualified expenses, the Trump Account finishes last because its earnings are treated as ordinary income. Click here or on the image below to see the interactive version.
A few results don’t fit neatly in the widget. Even with the $1,000 government deposit in the Trump Account (and nothing extra in the others), the handout doesn’t cover the tax bill in many scenarios. This is especially true at higher tax brackets and when parents contribute a lot of their own money. The widget also leaves out the 10 percent penalty on non-qualified Trump Account withdrawals. That penalty pushes the Trump Account further behind an unrestricted taxable account, which you can tap anytime, for anything, at capital gains rates. It also does not show the tax benefit from pre-tax employer contributions to Trump Accounts and many other complexities.
Congress could fix Trump Accounts by allowing families to deduct their contributions, following the tax treatment of traditional IRAs. Ideally, it would also scrap the subsidy and the restrictions, so Americans can save and spend their own funds on whatever they need without penalties from Washington.
Read more about Trump Accounts and how to fix them here.