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Trump Accounts: How the $1,000 baby investment plan could grow to $200,000
Trump Accounts give eligible US newborns $1,000 to invest in ETFs. Here's how the savings plan works, investment choices and long-term growth potential.
Donald Trump has launched a new savings program called Trump Accounts for eligible newborn babies in the US. Every eligible newborn will receive $1,000 from the US government to start investing from birth. The goal of the program is to help children build wealth over time by investing in the stock market from a very young age. Parents, family members and other eligible contributors can add up to $5,000 every year to the account.
Bloomberg Money spoke to Eric Balchunas, Senior ETF Analyst at Bloomberg Intelligence, about how the program works and what parents should know. Balchunas said parents should be happy because the government picked five low-cost and highly diversified ETFs for the accounts. He said the default investment is the State Street SPDR Portfolio S&P 500 ETF (SPYM).
Trump account ETFs
Parents mainly have one important choice to make—whether to invest in an S&P 500 ETF or a broader US stock market ETF. The S&P 500 ETFs available are SPYM and IVV, which mainly invest in large US companies. The broader market ETFs are ITOT, VTI and SPTM, which also include mid-sized and small companies.
However, he said the long-term returns of both types of ETFs are expected to be very similar. According to Balchunas, if parents contribute the maximum amount every year and investments earn an average 7% annual return, the account could grow to around $200,000 by the time the child turns 18, as noted by Bloomberg.
Money rules
One key difference is that money in Trump Accounts cannot be accessed until the child turns 18. Other savings plans may allow families to withdraw money earlier in certain situations. Another limitation is that Trump Accounts only allow investments in passive ETFs focused on US stocks.
Some people have suggested adding international investments or actively managed funds as options. But Balchunas said historical data suggests those alternatives are unlikely to outperform US stock ETFs over an 18-year period.
Future stock ownership
Looking ahead, Balchunas said the program could greatly increase stock ownership in the US. He said about 58% of Americans currently own stocks, which is already one of the highest rates in the world. He believes that number could rise to 70% to 80% because of Trump Accounts, as stated by Bloomberg. Balchunas said wider stock ownership could help reduce the wealth gap because more families would benefit when the stock market grows.
At the same time, he warned that America could become even more dependent on the stock market for retirement savings. He compared the stock market's future importance to major public services like the electric grid. Balchunas also warned that stocks are still risky and can go through long periods of losses. He said if millions more Americans own stocks through Trump Accounts, there could be greater political pressure on the government to support the stock market during major downturns.
