Trump ‘Baby Bonds’ Lack Potential to Fix Generational Wealth Gap

The Trump Accounts “baby bonds” and the expansion of the child tax credit reflect a growing national effort to provide children and parents with long-term financial tools. This year’s $3.4 billion tax-and-spending law created tax-exempt investment accounts for newborns and expanded credit eligibility and increased tax benefits to support families annually.

While this could be a step forward in shrinking the wealth gap, consider the actual impact these changes will have on certain US parents and children, compared with the American Rescue Plan and American Opportunity Accounts proposal. The Trump Accounts and the expanded CTC will likely fall short of delivering substantial benefits for children from lower-income families.

The baby bonds were established for each US citizen born with a Social Security number between Jan. 1, 2025, and Dec. 31, 2028. At birth, when the Social Security number is issued, the government will make a one-time contribution of $1,000 to each account.

The initiative resembles traditional individual retirement accounts and 529 college savings plans but has distinct differences, such as a contribution cap of $5,000 per child annually.

But while parents and family members can make the maximum contribution, employers can only contribute up to $2,500 per child annually. Contributions aren’t federal- or state-tax-deductible, though some states may adopt tax deductions in the future.

Funds in Trump Accounts will grow tax-deferred, with withdrawals taxed as ordinary income. The Council of Economic Advisers estimates that the Trump Account balance for a baby born in 2026 will be $303,800 by age 18 and $1,091,900 by age 28 if maximum contributions are made, assuming average returns on the US stock market.

Once the beneficiary turns 18, penalty-free (not tax-free) withdrawals are allowed for college tuition, small business expenses, and up to $10,000 toward a first-time home purchase.

Similar Accounts

The Trump Accounts are a stripped-down version of the American Opportunity Accounts proposal introduced in February 2023 by Sen. Cory Booker (D-N.J.) and Rep. Ayanna Pressley (D-Mass.).

Under the Booker-Pressley plan, every US newborn would receive an account seeded with $1,000 at birth. Critically, their proposal offers yearly government contributions of up to $2,000 per child, based on family income, with lower-income families receiving the maximum contribution each year.

The proposed accounts would provide ongoing, income-based contributions—benefiting children from low-income households who are less likely to receive family contributions. This approach was projected to have a significant effect on closing the generational wealth gap, especially for families with limited resources.

By contrast, the Trump Accounts mostly rely on family members to continue funding the accounts after the initial $1,000 government seed, reducing their impact for lower-income children.

CTC Comparison

The fiscal package also expanded the child tax credit, aiming to reduce income taxes for lower to middle-income class families.

The CTC increased from $2,000 to $2,220 per qualifying child starting in 2025 and will be adjusted for inflation for future tax years. The qualifying child must be 16 years old or younger at the end of the tax year.

The refundable portion was capped at $1,400 in 2018 and is capped at $1,700 per child under the new law. Income phase-out thresholds are now permanent. The phase-out thresholds are $400,000 for joint filers and $200,000 for all others and aren’t adjusted for inflation.

The updated CTC offers broader eligibility and increased tax benefits, but previous data suggests tax legislation under the American Rescue Plan was more beneficial, as families received the CTC as monthly installments of $300 per child. That temporary expansion significantly reduced child poverty and provided immediate tangible relief for families.

Although the new tax law’s dual approach of baby bonds and the expanded CTC represents progress in building financial security for US children, real impact for low-income families may be minimal.

Households with fewer resources may struggle to contribute additional funds to Trump Accounts and benefit less from the CTC due to limited tax liability. As a result, these measures may fall short of significantly bridging the generational wealth gap.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Sabrina James is the CEO and founder of accounting firm AccounTAXstic.

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