Editor's Note: Since this story was published, the Senate introduced a number of changes to how "Trump accounts" would work, including the structure of the accounts, who can contribute, contribution limits, qualified withdrawal restrictions and citizenship requirements. That legislation passed the House on July 3, and will be signed by President Donald Trump into law.
Along with Medicaid cuts and tax breaks, the massive budget bill passed by House Republicans contains a new program dubbed "Trump accounts" – government-funded investment accounts for every new American baby.
READ MORE: House Republicans narrowly passed Trump's 'big, beautiful' bill. Here's what's in it
The current proposal would automatically establish an account for each child and initially deposit $1,000. Economic experts have long advocated for this concept, variably known as baby bonds, child development accounts or child trust funds. Legislation supporting these kinds of accounts have been introduced several times in the last few decades. The idea is to introduce more Americans to investing and to build small amounts of wealth with little cost for the children or their families.
The provision included in Trump's big bill has bipartisan backing and is generally supported by economists and other researchers. But experts also told PBS News that there are ways the proposal could be restructured that are more practical and would have a greater effect on wealth inequality.
Here's what you should know about the "Trump accounts."
How would Trump accounts work?
The original House bill stipulated that the accounts would be available to any child born between Jan. 1, 2025, and Dec. 31, 2028, who is a U.S. citizen and whose parents have Social Security numbers (or, if the parents are unmarried, the parent who is filing for the account).
Parents can open an account for a child at any bank or qualifying institution. If a parent does not voluntarily create an account, the government will create one when the parent files a tax return.
When the account is opened, the government would deposit $1,000 in seed money. In any given year, a maximum of $5,000 can be contributed to the accounts.
When the child turns 18, they can spend the money in one of four ways:
- Higher education expenses
- Other qualifying post-secondary credentialing
- Small business or small farm expenses
- Purchasing a first home
When the child turns 31, they have access to the full funds of the account. Distributions are taxed at the capital gains rate.
Why are Trump accounts included in the 'Big Beautiful Bill'?
The issue has long had bipartisan support, said Ray Boshara, senior policy advisor at the Center for Social Development at Washington University in St. Louis.
Boshara worked on Capitol Hill in the mid-2000s and drafted baby bond bills for then-Sens. Jeff Sessions, Rick Santorum and Jim DeMint, all Republicans. Democratic sponsors co-signed many of those bills, and Boshara helped them introduce their own as well.
The idea also gained steam in 2010 when two economists, Darrick Hamilton and William Darrity Jr., published a paper arguing for substantive and progressive "baby bonds" intended to shrink or eliminate the racial wealth gap. They called for a significantly greater investment than the one currently proposed – tens of thousands of dollars for each baby. On average that would be about $20,000, rising progressively to $50,000 or $60,000 for the lowest-income families.
WATCH: A Brief But Spectacular take on building a birthright to capital
But in the last decade, many Republicans backed off the idea, Boshara said. Instead the proposals became the agenda of Democratic lawmakers such as Sen. Cory Booker, D-N.J., and former Sen. Bob Casey, D-Pa.
Today, "Republicans are back at the table, as opposed to being at the table for the first time," Boshara said.
"What caught everybody off guard was how quickly this $17.5 billion proposal emerged," he added.
What are the financial pros of baby bond accounts?
In general, the accounts would be a financial boon for everyone who gets one, said Madeline Brown, senior policy associate at the Urban Institute.
"It's really an opportunity to say, 'We're going to save now so that when you turn 18, you have a nest egg,'" Brown said.
Most families aren't saving or investing money that way, she said. So this type of program takes advantage of compounding interest of investment returns over nearly two decades to provide children with a handy sum.
An estimate from the Milken Institute puts that nest egg at around $8,000 after 20 years.
A major advantage of the accounts is the mechanism through which they deliver benefits, said Michael Sherraden, founding director of the Center for Social Development. While many social welfare programs are constructed around income support, or cash payments of various kinds, baby bonds focus on asset accumulation – a benefit normally relegated only to high earners and organized through the tax system.
Experts stress that in theory, these accounts are an important – if flawed – strategy to introduce more Americans to investing and potentially fight wealth inequality.
The accounts are automatic and universal, Brown said, two important factors in an equitable program.
What does the research say about child development accounts?
Sherraden and Margaret Clancy at the Center for Social Development launched an experiment 18 years ago, enrolling 2,700 Oklahoma children in child development accounts.
Research from that ongoing study has found that in addition to asset-building, the accounts had wide-ranging social benefits. Parents of children with accounts sustained "high expectations about their children's education," had less intense maternal depressive symptoms, and reduced punitive parenting practices. Children also had improved early social-emotional development and greater college preparation than children in the control group.
What concerns do experts have about the Trump accounts?
According to Sherraden, the current legislation constructs the accounts in a way that is unlikely to appeal to the financial institutions that would steward them.
It boils down to the fact that the accounts are individual investment accounts to be managed by any financial institution, and those are costly for banks to manage. The relatively small balance in each account will make them unpalatable for most banks, he said. Fees could also drain the accounts.
WATCH: Can 'baby bonds' help the U.S. close its staggering racial wealth gap?
An alternative approach would be a pooled structure, where the government would select one or two investment firms to manage the accounts. That's how 529 college savings plans and the Federal Thrift Savings Plan, a retirement plan for civil servants, are constructed. Boshara has heard that preference in approach in conversations with potential account managers.
It's what financial institutions seem to prefer, according to a series of Aspen Institute roundtables conducted in May with more than 50 experts in banking, investing, philanthropy and child savings accounts.
And it's what Sherraden learned from his experience helping create Individual Development Accounts, local programs that provide savings accounts for low-income people and rely on credit unions and banks. As gratified as he is with individual successes, Sherraden had hoped IDAs could be expanded beyond local programs toward a national policy, something they now know isn't viable.
"The way it was being implemented is pretty much the way that this [Trump accounts] proposal is written. People would just have these accounts in a bank, and that won't work. And we learned that in the most painful way," Sherraden said.
Another concern is that these accounts would be taxed at higher rates than 529 accounts, which grow tax-free and which offer federal tax-free withdrawals for eligible expenses. Low-income families are more likely to need to dip into savings or investment accounts for emergency expenses, Brown said, and they would pay higher rates on the Trump accounts if they're not used on qualifying expenses or withdrawn before the beneficiary turns 18.
There are some ways these accounts could perpetuate wealth inequality. For example, if the money in the accounts is not exempt from calculations for means-tested benefits, such as Supplemental Nutrition Assistance Program aid, families could see other government benefits decrease or disappear because on paper they have greater assets – even though the money can't be touched.
In addition, wealthier families could put more money (up to $5,000 a year) into those accounts and see their investments grow more dramatically than lower-income families who may not be able to contribute anything. That risk could be combated with a progressive contribution rate from the government or with additional federal deposits, Brown said.
One solution Boshara sees: Give the treasury secretary the authority to define and create these accounts, rather than Congress trying to work out all the details.