By Joe Light

The House of Representatives is moving along on a bill that would extend many cuts in the tax law passed during President Donald Trump's first term -- and do more. Among the surprise inclusions are tax-advantaged "MAGA" accounts for children.

While the accounts -- the acronym stands for "money account for growth and advancement" -- might seem to have emerged out of the blue, various versions of them have been kicked around for years by lawmakers and others. The proposal would allow for tax-preferred investment accounts that could be established for children under eight years old. The accounts could be invested in diversified stock funds, with the goal of helping Americans to learn the benefits of saving and investing at a young age.

The idea has been recently championed by Sen. Ted Cruz (R., Texas), but similar versions have had bipartisan support. In 2023, Sen. Cory Booker (D., N.J.) and Rep. Ayanna Pressley (D., Mass.) introduced a bill that would have created federally-funded savings accounts for children.

It will likely be months before Congress passes a final tax bill, meaning it isn't a sure bet that the MAGA accounts would survive in their current form. This is a look at how they would work as written now.

The federal government would seed the accounts

Under a proposal passed Wednesday morning by the House Ways and Means Committee, the government would create accounts for children born between 2025 and 2028 and seed them with an initial $1,000. Families could contribute up to $5,000 annually and invest the money in mutual funds. The bill also allows for some nonprofits, to be designated by the Treasury in the future, to contribute funds as well.

Tax-deferred but not tax-free

Savings in the account would grow without incurring taxes, and withdrawals aren't allowed before the child turns 18. Once parents or the beneficiary start taking out money, taxes become due.

How the money is used, and the age of the beneficiary, would determine the rate. Withdrawals for "covered expenses" -- including college, buying a first home, or some costs associated with starting a small business -- would be taxed at the rate for capital gains, with a current maximum of 20%. If the withdrawal happened for other expenses, it would be treated as ordinary income and taxed at rates as high as 37% under current rules. Withdrawals before the beneficiary turns 30, if not used for qualified expenses, would incur an additional 10% penalty.

Support is broad

As Congress debates the tax bill, MAGA accounts -- among many other provisions -- could eventually hit the cutting-room floor. That said, the MAGA provision has a few things going for it that will help it survive.

In addition to the historical bipartisan support, the provision is relatively cheap -- costing about $17.3 billion over the next decade, according to the Joint Committee on Taxation. That makes it unlikely to be axed merely to reduce the bill's costs.

"We expect MAGA accounts will be included in the version of the reconciliation package that the House approves. And it is likely to survive the Senate as the cost is low enough that we believe most Republicans will want to avoid being accused of killing something called MAGA," wrote TD Cowen analyst Jaret Seiberg in a research note on Wednesday. He said Democrats would likely vote for it were it not for its name.

In addition to the lawmaker support, the provision is likely to be supported by the investment management industry, which could collect fees on the accounts, Seiberg wrote. Though the Ways and Means bill would only seed the accounts through 2028, Seiberg wrote that a future Congress could make that permanent.

Write to Joe Light at joe.light@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 14, 2025 14:33 ET (18:33 GMT)

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