In today’s news, the Dells are donating $6B (yes, with a B) to children born in zip codes where the median income is $150k or less. The donation will be to the individual Trump Accounts so the amount donated might vary based on participation.
It is worth noting that while it is great to get some free money from the government (who doesn’t like a handout), this is in reality, another method to tax Americans.
Parents will be encouraged to contribute to this account up to the annual maximum of $5000 a year. I generally discourage most parents from doing so.
Based on all that we know so far, upon turning 18, the accounts become IRAs thus every dollar in earnings is subject to being taxed. There is no tax deduction on the contributions - they are after tax (unless made by your employer). Now, you may be able to covert it to a Roth (still to be confirmed by Treas.) and pay income taxes at the child’s tax rate but if the account has grown to tens of thousands of dollars, that will still likely means some federal and state income taxes being paid on the money. The tax treatment on this is similar to how a non-qualified annuity is taxed.
Generally, parents will be better off doing a custodial account (with very little if any LTCG and Qual Divs) or a college savings plan*.
Take the free $1000 but don’t add to it. In general, there are better alternatives.
*now up to $35k in college savings plans can be converted to a Roth (over a number of years) with no tax implications.