Yves here. News you can use, here on the many shortcomings of the Trump account system. There are better ways to save money for college.
By Dean Baker, founder and chief economist of the Center for Economic and Policy Research. He is the author of several books, including “Back to Full Work: A Better Deal for Working People,” “The End of Abandoned Freedom: Making Markets Grow,” “The United States Since 1980,” “Social Security: The Phony Crisis” (with Mark Weisbrot), and “The Conservative Nanny State: How the Rich Run Rich Government.” He also has a blog, “Beat the Press,” where he discusses economic issues in the media. Originally published on Common Dreams
I am serious, and this is not just my disgust with everything Trump. There is no good reason for the majority of people in the country to put a dollar in their children’s Trump account.
To be clear, I am not against tax sheltered accounts in general. They strike me as a very inefficient way to achieve social goals, in this case making education more accessible. A more efficient route would be to have more public funds to support public colleges and community colleges.
The tax-sheltered account route also favors high earners. More than a quarter of households don’t owe taxes, meaning they won’t benefit from putting money into a tax-sheltered account. The other 20 percent is not in the 10 percent bracket, meaning the account will just save them 10 cents for every dollar invested. In contrast, high-income households save 37 cents for every dollar invested in a tax-sheltered account.
In addition, tax-sheltered accounts put more money in the hands of the financial industry. Tens of billions of dollars go to the people and companies that manage these accounts, creating an invisible layer of wasteful management.
To be fair, Trump accounts have a spending limit of up to 0.1 percent of assets, which is much lower than what most accounts charge. This is an important point. People can get cheap money from other accounts as well. Stock index funds generally have very low fees, and many people would be wise to use them to their advantage. People will tell you they will beat the market, but most won’t, and you’ll end up wasting money on high fees and trading costs.
But that has nothing to do with people’s decisions about where to put their money. For better or worse, Trump’s accounts exist. The question is whether people will be helping their children by investing in 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 child’s education. The main difference between the accounts for this purpose is that it is possible to withdraw money from the 529 account, if necessary, when it is not possible to withdraw money from the Trump account for any reason, until the child turns 18 years old.
People pay a penalty for withdrawing money from a 529 early, but at least they can access it when they need it. And unexpected events happen. People can lose their jobs, have huge medical expenses, or get divorced. These and other unforeseen circumstances may require people to dip into whatever savings they have. With a 529 plan, they can use the money when they really need it. By Trump’s account, they’re out of luck.
It is important to note that withdrawals for non-educational purposes are very common. A recent study by Vanguard found that 2 percent of accounts had improper withdrawals in an average year. If an account has been open for an average of 20 years, this would mean that 40 percent of accounts have improper withdrawals. People don’t expect bad things to happen, but they do.
Also, since the penalty is based only on a portion of the 529 plan’s profits, not the total amount in the plan, in most cases it is likely to be less. Let’s say someone withdraws $5K from a 529 plan, where benefits are currently 40 percent of the money in the plan. That means they will pay taxes on $2,000, plus a 10 percent penalty. If they are in the 10 percent bracket, their taxes would be $200, and their penalty would be $200. If they were in the zero bracket, say because they lost their job, they would only pay a $200 fine. That compares to not being able to touch their money at all in Trump’s account. (The money in the 529 is not taxed at all if it is used for educational purposes. The money earned in the Trump account is taxable.)
It is also worth mentioning that it is not even possible to change the asset allocation in the Trump account. Let’s say your child is 17, one year too young to withdraw. If you’re worried that there’s an AI bubble that might burst, and you’d rather have your money in Treasury bonds, you’re out of luck. Trump accounts won’t let you make the change; you have to go down with Elon Musk and the rest of the market.
An absurd argument given by supporters of Trump accounts is that they can be rolled over into an IRA to allow for lifetime wealth accumulation. So are funds in 529 accounts, up to $35,000.
The Trump gang is making a big deal about the $35,000 ceiling, but this is something only the elite types with a lot of money care about. Very few people ever accumulate more than $35,000 in a 529 account, and most people who do will have other education-related expenses that can reduce the account’s value below $35,000. Remember, even food and housing can be counted as education-related expenses.
But let’s say someone ends up with more than $35,000 to spend on education-related expenses. Let’s say they have $40,000 they want to transfer to an IRA. In this case they will have to pay a penalty of 10% on the amount over $35,000. That would be a $500 to $5,000 difference.
They will also have to pay taxes on $5,000. The beneficiary is the one who receives the money, so they would pay tax. Since they have just started their career, they probably have a small salary. This means they will likely be in the 10 percent or 15 percent tax bracket, and possibly the zero bracket.
So, this is the worst situation Trump account supporters say it’s important to avoid, so skip the 529 and put your money in a Trump account instead? That seems pretty cool, and why do you need to fire your financial advisor if they suggest you put money into Trump’s account.
To be clear, take the $1K Trump wants to give to newborns. It would be a much better use of tax dollars if we provided food and medical care to children from low income families than handing out $1K checks to millions of families who don’t need it. But you cannot change the insurance by refusing the money. If it bothers you, donate money to a good cause, but take the money and don’t put another cent in Trump’s account.
