A new savings account for children that comes with a $1,000 deposit remained in the Senate’s version of President Trump’s budget bill

Senate tax bill includes $1,000 baby bonus in 'Trump accounts' — here's who qualifies

A new savings account for children that comes with a $1,000 deposit remained in the Senate’s version of President Trump’s budget bill

A new savings account for children with a one-time deposit of $1,000 from the federal government remained in the U.S. Senate's version of President Donald Trump's budget bill.

Under the proposal, so-called "Trump accounts," a type of tax-advantaged saving accounts, would be available to all children under the age of eight years old who are U.S. citizens. In earlier versions of the proposal, Trump accounts were termed "Money Accounts for Growth and Advancement" or "MAGA accounts."

If the bill passes as drafted, parents will be able to contribute up to $5,000 a year and the balance will be invested in a diversified fund that tracks a U.S.-stock index. This part of the Senate Republicans' version of the One Big Beautiful Bill Act was largely unchanged from the House plan advanced in May. 

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How Trump accounts work

Not unlike a 529 college savings plan, Trump accounts come with a tax incentive. Earnings grow tax-deferred, and qualified withdrawals are taxed as long-term capital gains.

Under both the House and Senate versions of the bill, withdrawals could begin at age 18, at which point account holders can tap up to half of the funds for education expenses or credentials, the down payment on a first home or as capital to start a small business.

At 25, account holders can use the full balance for expenses that fall under those same guidelines and at 30, they can use the money for any reason. Distributions taken for qualified purposes are taxed at the long-term capital-gains rate, while distributions for any other purpose are taxed as ordinary income.

$1,000 baby bonus: Who is eligible

For children born between January 1, 2024, and December 31, 2028, the federal government will deposit $1,000 into the Trump account, funded by the Department of the Treasury, as part of a "newborn pilot program," according to the Senate Finance Committee's proposed text released on Monday.

To be eligible to receive the initial seed money, a child must be a U.S. citizen at birth and both parents must have Social Security numbers.

If a parent or guardian does not open an account, the Secretary of Treasury will establish an account on the child's behalf. Parents may also opt out.

Trump account pros and cons

The White House and Republican lawmakers have said these accounts will introduce more Americans to wealth-building opportunities and the benefits of compound growth. But some experts say the Trump accounts are also overly complicated, making it harder to reach lower-income families.

Universal savings accounts, with fewer strings attached, would be a simpler alternative proposal at a lower price tag, according to Adam Michel, director of tax policy studies at the Cato Institute, a public policy think tank.

"I'm disappointed the Senate did not take the opportunity to improve these accounts," Michel said. Still, "provisions that remain in both the House and Senate text, we should expect them to become law, and this provision fits that criteria." 

Mark Higgins, senior vice president at Index Fund Advisors and author of "Investing in U.S. Financial History: Understanding the Past to Forecast the Future," said the key is "if the benefits comfortably exceed the cost."

According to the Committee for a Responsible Federal Budget, Trump accounts would add $17 billion to the deficit over the next decade.

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This story originally appeared on: CNBC - Author:Jessica Dickler