What are Trump accounts? What are Baby Bonds?

The One Big Beautiful Bill Act (OBBBA) introduced President Trump’s signature savings accounts to the mix of existing asset-building policies. This post explores the structure of Trump accounts, as well as other proposals designed to help families build wealth.

What are Trump accounts?

Trump accounts allow parents and employers to contribute up to $5,000 per year (indexed for inflation) to individual retirement accounts on behalf of children under the age of 18, regardless of their parents’ income. Each child born between 2025 and 2028 will also receive a $1,000 seed deposit from the federal government. Funds in these accounts can be invested in any mutual fund or exchange-traded fund that tracks the S&P 500 or is comprised primarily of U.S. companies.

While contributions made by parents are not tax-deductible, contributions made by employers—capped at $2,500 per year (also indexed for inflation)—do not count towards employees’ taxable income. Taxes on investment earnings are deferred but taxed as ordinary income upon withdrawal. Unqualified withdrawals, such as purchasing a car, are subject to an additional 10% penalty.

What are the arguments for and against Trump accounts?

Backers of Trump accounts believe that these accounts will provide financial stability, greater economic opportunity, and a higher incentive to save for “millions of American children.” The Council of Economic Advisers (CEA) estimates that, assuming medium returns, Trump accounts will yield a balance of $303,000 by age 18 if maximum contributions are made. Even if no contributions are made beyond the $1,000 initial deposit, the CEA predicts that Trump accounts will yield a balance of $5,800 by age 18. CEOs of several large companies, including Dell, Uber, and Goldman Sachs, have voiced their support of Trump accounts and have pledged to contribute to accounts for their employees’ children.

Given that Trump accounts depend primarily on family and employer contributions, however, many policymakers predict that these accounts will disproportionately benefit wealthy Americans. Research from other wealth-building policies suggests that wealthy individuals are significantly more likely to contribute to voluntary “asset-subsidy schemes,” and that these individuals hold considerably more wealth in tax-advantaged accounts than asset-poor families. “A wealthy family could build a $150,000 nest egg by the time their child turns 30. Meanwhile, a child from a low-income family is likely to be left with about $2,500,” Connecticut Treasurer Erick Russell said of Trump accounts.

Critics also point out that the tax benefits for Trump accounts are less generous than those for existing college and retirement savings programs, such as 529 college savings plans and Roth IRAs. Trump accounts, therefore, “do not offer much of an additional incentive to save,” write Alex Muresianu and Sam Cluggish of the Tax Foundation.

Trump accounts add to an already crowded market for savings accounts; by the Tax Foundation’s estimates, families can choose from at least 11 different tax-advantaged savings vehicles. Unlike some of the alternatives (described below), however, Trump accounts are “subsidizing the transmission of intergenerational wealth for those that already have wealth in the first place,” says Darrick Hamilton of the New School for Social Research.

What are Baby Bonds?

First proposed by Darrick Hamilton and William Darity in 2010, Baby Bonds are universal, financially progressive child trust funds. The government would make an initial deposit into an interest-bearing account on behalf of each newborn baby in the United States, while also making additional deposits throughout their childhood.  Children from the lowest-wealth households would receive the largest endowment.

At age 18, individuals would gain access to the funds, which could only be used to invest in wealth-generating assets, such as a home, post-secondary education, or a small business startup. While Baby Bonds are nominally race-neutral, Black, Hispanic, and Indigenous children—whose parents hold significantly less wealth than their white counterparts, on average—would benefit the most in terms of asset ownership and wealth accumulation.

Hamilton and Darity estimate that the program would cost roughly $60 billion per year, assuming that the average endowment is set at $20,000 and 3 million babies are enrolled annually. They suggest funding a Baby Bonds program by raising the estate tax, charging fees to manage the Baby Bonds trust, or instituting a wealth or millionaire’s tax. Some scholars believe that if Baby Bonds reduce dependence on social safety net programs in the long run, a federal program could save the government money over time.

Baby Bonds are not meant to be a standalone policy. Given the delayed returns of homeownership or a post-secondary education, Madeline Brown and her co-authors note, it is critical to supplement a Baby Bond program with “robust safety net programs and income supports” that can meet individuals’ day-to-day economic demands.

How and why do Baby Bonds differ from Trump accounts?

Unlike Trump accounts, Baby Bonds directly address wealth inequality. In 2020, the wealthiest 10% of the U.S. population held nearly three-quarters of the country’s wealth. Wealth disparities are more extreme along racial lines. In 2022, the typical Black household held 15% of the wealth of the typical white household, and the typical Hispanic household held 20%.

A significant portion of the racial wealth gap can be attributed to inheritances and intrafamily gifts, with wealth transfers among white families both larger and more frequent than transfers within Black and Hispanic families. Of the hundreds of billions of dollars that the federal government annually spends on asset-building policies, furthermore, millionaires receive an average tax break worth more than 700 times the average tax break received by households earning $50,000 per year.

Baby Bonds were proposed as one method for closing the dramatic racial wealth gap. With the explicit goal of ensuring that all children born in the U.S. begin adulthood with a sizeable nest egg, combined with the program’s progressive design, Shira Markoff, David Radcliffe, and Darrick Hamilton argue that “Baby Bonds could go a long way towards eliminating the transmission of economic advantage or disadvantage across generations.”

What is happening in Congress with Baby Bonds?

Sen. Cory Booker (D-N.J.) introduced federal Baby Bonds legislation—termed the American Opportunity Accounts Act—in 2018, before later reintroducing it alongside Representative Ayanna Pressley (D-Mass.) in 2019, 2021, and 2023.

American Opportunity Accounts would have automatically provided each child born in the United States with an initial deposit of $1,000, supplemented by annual, progressive contributions of up to $2,000 based on family income. Booker’s office projected that by the time these children turned 18, the account balances of the lowest-income beneficiaries would have reached $46,000, assuming an annual return of 3%. The funds could then be used for a restricted set of asset-building purposes, such as purchasing a home or pursuing post-secondary education.

Booker suggested paying for the accounts by increasing the top tax rate on long-term capital gains and dividends, eliminating the step-up basis for capital gains at death, and increasing the estate tax rate to at least 45% on inheritances above $3.5 million. The Committee for a Responsible Federal Budget (CRFB) estimates that these changes to the tax code would raise approximately $700 billion in revenue over the next decade, more than offsetting the program’s estimated $650 billion cost.

What is happening at the state level?

Connecticut is the only state to enact statewide Baby Bonds legislation. Connecticut’s program, which went into effect in July 2023, provides each child born to a Medicaid-eligible household with $3,200 at birth, an endowment that is projected to grow to between $11,000 and $24,000 by adulthood. Upon turning 18, beneficiaries will be allowed to use their Baby Bonds funds to make a down payment on a home, start a small business, pay for college tuition, or save for retirement.

Connecticut’s Baby Bonds program has enrolled approximately 33,000 low-income babies born in the state since July 2023, with the total value of the trust increasing from $381 million to roughly $485 million. Following the passage of the One Big Beautiful Bill Act, Connecticut Treasurer Erick Russell explicitly differentiated his state’s Baby Bonds program from Trump accounts: “[Connecticut] Baby Bonds were created to narrow Connecticut’s generational wealth gap by investing directly in children from low-income families, whereas Trump Accounts advantage families who already have the ability to save, while leaving behind those who don’t,” he said.

What does economic research say about Baby Bonds?

No federal Baby Bonds program exists, but several researchers have simulated a federal Baby Bonds program.

Simulations find that a race-neutral, financially progressive Baby Bonds program would disproportionately benefit Black and Hispanic families. Assuming a $1,000 initial endowment, a 1 to 3% annual rate of return, and progressive annual contributions of up to $2,000, Mitchell and Szapiro (2020) estimate that Black children would receive a median account balance of $27,500, Hispanic children a balance of $19,800, and white children a balance of $7,100 by the time they turn 18. At the upper end of the distribution, 31% of children receiving the top 10% of benefits would be Black.

These studies consistently find that a federal Baby Bonds program would narrow the racial wealth gap. Zewde (2020), who assumes progressive initial endowments of $200 to $50,000 based on family wealth, estimates that Baby Bonds would reduce the Black-white wealth gap from 15.9x to 1.4x at the median. Weller, Maxwell, and Solomon (2021) evaluate five policies designed to close the racial wealth gap and find that Baby Bonds would result in the single largest reduction in racial wealth inequality.

Setting race aside, Cosic et al. (2024) show that a Baby Bonds program would have dramatic redistributive effects along the income ladder: the amount of wealth held by individuals in the top income quintile would fall from 14x the amount of wealth held by individuals in the bottom quintile to 5x. These authors also find that using Baby Bonds to pay for college tuition would significantly reduce student loan debt, especially for Black and Hispanic students.

Even with this potentially large reduction in the racial wealth gap, significant wealth disparities would remain. Weller, Maxwell, and Solomon (2021), who construct a hypothetical Black and white household and follow each over the course of 40 years, estimate that it would take an initial transfer of $192,711 in 2020 to fully close the racial wealth gap by 2060. However, combining Baby Bonds with other wealth-generating policies, such as forgiving student loan debt or addressing housing and lending discrimination, could double the effect of Baby Bonds in closing the racial wealth gap.

What are Child Development Accounts?

Child Development Accounts, or CDAs, are investment accounts designed to help parents save for their children’s post-secondary education. CDAs typically subsidize savings through government contributions, matching incentives, and tax benefits. As of 2020, approximately 500,000 children had participated in one of 70-plus CDA programs across 36 states.

Research from the original CDA pilot, the Savings for Education, Entrepreneurship, and Downpayment (SEED) National Initiative, suggests that providing families with a state 529 savings account, a $1,000 initial deposit, and one-to-one matching marginally increased savings. In the same randomized experiment, only 62% of eligible families opened accounts, and the most disadvantaged families were the least likely to opt in to the program.

A later wave of SEED, which began in Oklahoma in 2007, automatically opened state 529 savings accounts for members of the treatment group. By 2014, the average account balance among the treatment group was $1,851—a striking 6x higher than the control group. SEED OK reported several non-pecuniary benefits as well, such as improving parental expectations of their children’s educational outcomes.

Similar to Trump accounts, families can contribute to CDAs, with many CDAs offering matching programs. The issue with this approach, Ben Case of the University of Wisconsin-Madison writes, is that “more advantaged children continue to have more assets and parents with the greatest financial knowledge save more than parents with lower financial literacy.”

What are 529 savings plans?

529 accounts, like CDAs, are tax-advantaged savings accounts that allow parents to set aside funds for their children’s college, trade school, graduate school, or private K-12 education. As of 2024, approximately $508 billion was saved across 16.8 million 529 accounts. While contributions to 529 accounts are not tax deductible at the federal level, investments grow tax-free and are not subject to capital gains taxes upon withdrawal. Many state-sponsored 529 plans, furthermore, allow parents to deduct 529 contributions from their taxable income up to a certain limit. Critics of 529 plans argue that these accounts effectively function as tax shelters for the rich, given their role in reducing high earners’ tax liabilities. (Yearly contributions to 529 plans are not capped, but contributions are subject to the gift tax exclusion.) Wealthy families are also significantly more likely to open and contribute to 529 plans. In 2010, the median wealth of families with a 529 account was approximately 25 times the median financial wealth of families without a 529 plan.