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The proposal – called the 401Kids Savings Act – was 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 the provision of savings accounts for every child in the US in state 529 college savings platforms, which will be managed by state Treasurers. Accounts can be established for children under the age of 18, and for newborns.
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More than 80% of young adults, aged 18 to 24, have less than $20,000 in wealth, according to a proposal report citing 2019 Federal Reserve data.
The bill aims to double that, by making it so that a qualifying low-income single parent with a newborn can collect more than $53,000 in child benefits by the time they turn 18.
“Lack of income means you can’t get by, but lack of wealth means you can’t move on,” Casey said in a statement. “As American families grapple with rising costs, they deserve a way to save not only for their future, but for their children’s future.”
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Through 401Kids, families are eligible to make annual contributions of up to $2,500 per child ages zero to 17.
Low- to moderate-income families may also qualify for annual federal deposits until a child turns 18.. Families with modified adjusted gross income below $75,000 for single tax filers or $150,000 if married receive $500 per year per child. Contributions phase out for incomes above thresholds.
Children in households that qualify for the earned income tax credit — which aims to reduce the federal tax burden for low- to moderate-income workers — will receive more help. That includes an additional $250 per year, even if the EITC is not claimed. EITC-eligible households can also receive a $1 to $1 savings match on individual contributions up to $250 per year.
In addition, families may qualify for state contributions where applicable.
Children can only use the fund once they turn 18. The money should be used for education or training, buying a house or starting a business.
Alternatively, the funds can be rolled into a Roth individual retirement account or ABLE account for children with disabilities.
Under the plan, a single parent who qualifies for the earned income tax credit and has $40,000 in adjustable gross income can save more than $53,000 by the time a newborn child turns 18. That estimates claim $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 money invested based on the children’s age.
To be sure, it remains to be seen if the bill will gather enough support from both sides of the aisle to become law.
The proposal comes as Congress prepares to consider a new expansion of the child tax credit. It is estimated that the new child tax credit will help about 16 million children from low-income families in the first year, according to the Center on Budget and Policy Priorities.
“I’m not surprised to see more child savings accounts introduced at the federal level, especially given the child tax credit’s emphasis on basic needs,” said Madeline Brown, senior associate of policy at the Urban Institute, a Washington, DC-based think tank.
Last year, Democratic lawmakers renewed a push for “baby bonds” that would give every American child $1,000 at birth. The funds are then topped up by up to $2,000 per year based on families’ income.
Both child savings accounts and baby bond programs are tested at the state and local levels. Baby bonds specifically target racial wealth gaps, according to Brown. Children’s savings accounts can also achieve that goal depending on how they are set up and structured, he said.
“It’s been the last 15 to 20 years that we’ve seen this nationwide take-up of these programs,” Brown said.
An experiment called SEED for Oklahoma Kids, established in 2007, is the longest-running implementation of a child development account, according to Brown.
Baby bond programs, more recently, have been established in Washington, DC and Connecticut based on Medicaid eligibility, he said. California has also established a pilot program for children either in long-term foster care or who have lost a primary caregiver due to Covid.