Personal finance

New bill in Congress calls for creating children’s savings accounts from birth. Here’s how it would work

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Building wealth may feel like a struggle for today’s younger generations who grapple with student loan balances and high home prices.

Now, a new bill introduced in Congress aims to make it so wealth creation starts from birth.

The proposal — called the 401Kids Savings Act — is led by Democratic Sens. Bob Casey of Pennsylvania, Chuck Schumer of New York, and Ron Wyden of Oregon, as well as Democratic Reps. Don Beyer of Virginia, Joyce Beatty of Ohio and Suzan DelBene of Washington.

The plan calls for providing savings accounts for every child in the U.S. on state 529 college savings platforms, which would be managed by state Treasurers. Accounts would be established for kids under age 18, and for newborns.

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More than 80% of young adults, ages 18 to 24, had less than $20,000 in wealth, according to a report on the proposal that cites 2019 Federal Reserve data.

The bill aims to double that, by making it so a qualifying low-income single parent with a newborn may accumulate more than $53,000 for that child’s benefit by the time they turn 18.

“A lack of income means you can’t get by, but a lack of wealth means you can’t get ahead,” Casey said in a statement. “As American families grapple with rising costs, they deserve a way to save not just for their future, but for their children’s future.”

How the 401Kids account would work

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Through 401Kids, families would be eligible to make annual contributions of up to $2,500 per child ages zero to 17.

Low- to moderate-income families would also be eligible for annual federal deposits until a child turns 18. Families with modified adjusted gross income under $75,000 for single tax filers or $150,000 if married would receive $500 per year per child. The contributions would phase out for incomes above those thresholds.

Children in households that are eligible for the earned income tax credit — which aims to reduce the federal tax burden for low- to moderate-income workers — would receive additional aid. That includes an additional $250 per year, even if the EITC is not claimed. EITC eligible households may also receive a $1 to $1 savings match on individual contributions for up to $250 per year.

In addition, families may be eligible for state contributions where applicable.

Children would only be able to use the funds once they turn 18. The money would have to be used for education or training, buying a home or starting a business.

Alternatively, the funds could be rolled over to a Roth individual retirement account or ABLE account for children with disabilities.

Under the plan, a single parent who is eligible for the earned income tax credit and who has $40,000 in adjustable gross income may accumulate more than $53,000 by the time a newborn child turns 18. That estimate assumes $21,000 in federal funding, $8,500 in family contributions and $24,000 in investment returns.

The plan includes automatic enrollment starting at birth, with the money invested based on children’s ages.

Other efforts to provide funds for children

To be sure, it remains to be seen whether the bill can gather sufficient support from both sides of the aisle to become law.

The proposal comes as Congress is poised to consider a new expansion of the child tax credit. Estimates have found the new child tax credit could help about 16 million children from low-income families could in the first year, according to the Center on Budget and Policy Priorities.

“I’m not all that surprised to see further child savings accounts introduced at the federal level, especially given the emphasis on child tax credit, basic needs,” said Madeline Brown, senior policy associate at the Urban Institute, a Washington, D.C.-based think tank.

Last year, Democratic lawmakers renewed a push for “baby bonds” that would provide every American child with $1,000 at birth. The funds would then be topped off with up to $2,000 per year based on families’ incomes.

Both child savings accounts and baby bond programs are being put to the test at the state and local levels. Baby bonds specifically target racial wealth gaps, according to Brown. Child savings accounts can also accomplish that goal depending on how they are set up and structured, she said.

“It’s been the last 15 to 20 years that we’ve seen this across the country pickup of these programs,” Brown said.

One experiment called SEED for Oklahoma Kids, which was established in 2007, is the longest-running implementation of a child development account, according to Brown.

Baby bond programs, which are newer, have been established in Washington, D.C. and Connecticut based on Medicaid eligibility, she noted. California has also established a pilot program for children either in long-term foster care or who lost a primary caregiver due to Covid.

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