While retirement-related provisions were conspicuously (and thankfully) absent from the House Ways and Means Committee’s massive tax cut reconciliation proposal released Monday afternoon, it did include one notable provision to create what is being likened to a “401(k) for kids.”
“This is essentially a 401(k) for every newborn in America, and just like with 401(k)s, employers have seen it is a very attractive benefit for their employees to match or help seed those savings accounts.”
Sen. Ted Cruz (R-TX)
Something called “Money Accounts for Growth and Advancement”—no doubt worded as such so the acronym for it is “MAGA” accounts—made it into the “Description of the Tax Provisions of the Chairman’s Amendment in the Nature of a Substitute to the Budget Reconciliation Legislative Recommendations Related to Tax”—also referred to by the GOP as “One, Big, Beautiful Bill.” And despite this coming from the House Ways and Means Committee, it is actually Senator Ted Cruz (R-TX) who is getting credit for the inclusion of the MAGA accounts provision.
Cruz initially used the name “Invest America” for his idea to seed tax-advantaged investment accounts with $1,000 for every newborn baby with a Social Security number, naming it after the coalition of businesses and philanthropists pushing the idea while spending more than a year advocated for it, reports news website Semafor. It got the Trump-friendly rebrand on its way to the House Ways and Means committee’s tax cut measure.
“You can call it anything you like. What is powerful is enabling every child in America to have an investment account and a stake in the American free enterprise system,” Cruz told Semafor in an interview on Monday. “This is essentially a 401(k) for every newborn in America, and just like with 401(k)s, employers have seen it is a very attractive benefit for their employees to match or help seed those savings accounts.”
The basic idea
If MAGA accounts were to come to fruition, the plan would be for the federal government to contribute $1,000 via a credit into an account opened for U.S. citizens born between January 1, 2024, and December 31, 2028, as part of a proposed pilot program. Family, friends and employers (of the parents) would be allowed to contribute up to $5,000 annually to the child’s account. Getting buy-in from employers to contribute to the accounts of the kids of their employees is seen as a key to the program’s potential success. Semafor reported that several larger companies like Uber, Dell, Nvidia and Oracle have pledged to do so.
Money paid into the MAGA accounts would have to be invested in a diversified fund that tracks an established index of U.S. equities such as the S&P 500, or which invests in an equivalent diversified portfolio of U.S. equities. The idea is the money in each child’s account would accumulate interest and value so by the time accountholders are eligible to receive distributions upon turning 18, they would have tens of thousands of dollars available to use on education, start a business or buy a home.
“A baby that is born this year that starts with the initial $1,000 seed contribution, over the next 18 years, if $5,000 a year is contributed, at 7% growth, by the time they’re 18 they have $170,000 in this account. By the time they’re 35 they have $700,000 in this account. I believe this will be a transformational policy,” Cruz told CNBC’s Squawk Box on Tuesday.
“It’s a 401(k) for kids,” Cruz continued. “Think about how 401(k)s have changed our society. One of the really powerful things is I think a lot of employers—when this is passed—will find it a very attractive benefit to give to their employees to say, ‘hey, we’re going to match your contribution to these investment accounts for your kids or we’re even going to seed them, just like they do with 401(k)s,” Cruz said. “What I’m interested in is giving these kids the ability to climb the economic ladder much, much faster to accumulate wealth.”
Different than ‘Baby Bonds’
Cruz has also tried to stress that the idea is different that the “Baby Bonds” proposal previously floated by Democrats that would not allow investments in the private equities markets. He called that merely another government program, “where this is very much designed to get the next generation to invest in the market,” Cruz told Semafor.
Senator Cory Booker (D-NJ), alongside Representative Ayanna Pressley (D-MA), has championed the “Baby Bonds” initiative through the American Opportunity Accounts Act, last introduced in Congress in 2023. That proposal aims to address the racial wealth gap and promote economic equity by providing every American child with a federally funded savings account at birth via a $1,000 deposit into a federally managed account. Depending on family income, additional annual deposits of up to $2,000 would be made until the child turns 18. That program is proposed to be financed through reforms to federal estate and inheritance taxes, including restoring the estate tax to 2009 levels.
What’s next
Cruz has acknowledged that he and fellow Republicans have lots of work to do to educate the public about the new program, and that the House’s draft of MAGA accounts could be further revised.
House Republicans are seeking to pass the bill by the end of next week, in hopes that it can reach President Trump’s desk by July 4. While it may pass via budget reconciliation without Democratic votes, the Republicans’ small majority means they can only afford to lose a few votes for this to happen.
SEE ALSO:
• Bill to Make 401(k)s Available to 18- to 20-Year-Olds Reintroduced in Senate
• Let Ben Franklin Create ‘Middle Class Millionaires,’ Eradicate Poverty in America
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.