Baby On Board and $1,000 In The Bank

Have you heard about the American Opportunity Accounts that were included as part of the OBBBA bill that passed earlier in July? If not, then maybe you’ve heard about the Trump Accounts which is the more common way they’re being talked about in the media. In short, every newborn between January 1, 2025, and December 31, 2028, gets a new account and a one-time $1,000 contribution from the government.

This is one of the temporary measures in the budget, along with lower/no tax on tips, etc. This could very well be extended or made permanent as we’ve discovered with other tax cuts or assistance measures.

What are the basics of these new accounts?

• The account is set up automatically and there are no income limits or eligibility requirements. Only a social security number is needed.
• The $1,000 from the government will be invested in an index fund with limited options for how it’s invested (which might actually be a good thing in this case).
• Family members and even employers can add up to $5,000 a year. Just know there’s no tax deduction if you’re contributing on your own.
• At age 18, the money can be used for specific things like education or buying a home.
• Once the child turns 30, the money can be used for anything, but it will be taxed like a Traditional IRA (this is not a good thing).  

There are other details, but I’m not including them here since it’s still unclear how everything will be rolled out.

So what does this mean for you?

If you have a child born in 2025, or expect one soon, this is definitely a positive update. In my opinion, the American Opportunity Accounts help, but they don’t solve the bigger challenge of saving for college or other expenses. If you want to support your children or grandchildren financially, contributing to a tax-friendly 529 college savings plan or even UTMA account is probably still the better option. Also don’t forget the entirely separate American Opportunity Tax Credit (enacted in 2009), which allows for a maximum $2500 credit for qualified educational expense.

Like I said earlier, there’s no tax break if you put money into these new accounts.

And if you end up with one or several of them, depending on how many children you have, you’ll still need to keep track of them.

I wouldn’t be surprised if ten years from now some parents forget they even have them…