401Kids Savings Account Act of 2024

“(f) 401Kids Account Programs

“(1) In general—A qualified tuition program shall not be treated as failing to meet the requirements of this section solely because such program includes a 401Kids Account Program.

“(2) 401Kids Account Program—For purposes of this section—

“(A) In general—The term 401Kids Account Program means a program established and maintained by a State or agency or instrumentality thereof which—

“(i) establishes a savings account (referred to in this subsection as a “401Kids Savings Account”) which meets the requirements of this subsection on behalf of every eligible individual as of the later of—

“(I) birth or naturalization, or

“(II) establishment of the program under this section,

“(ii) requires the assets of each 401Kids Savings Account established under the program to be held by a person designated by the State or agency or instrumentality,

“(iii) within the limitations of paragraph (3), permits contributions to be made periodically to such 401Kids Savings Accounts by direct deposit through payroll deduction or by electronic means, and by methods that provide access for people with limited access to the financial system,

“(iv) provides for the annual deposit under section 3(b)(4) of the 401Kids Savings Account Act of 2024 and the matching contributions under section 3(b)(5) of such Act to be made to such 401Kids Savings Accounts, if applicable,

“(v) permits distributions and rollovers from such 401Kids Savings Accounts as provided in paragraph (4),

“(vi) except as provided in the second sentence of this subparagraph, prohibits multiple accounts from being established for the same individual, and includes—

“(I) procedures to consolidate multiple accounts established for the same individual and return excess contributions on an annual basis, with notice provided to the parent or guardian of the individual (or, if appropriate, to the individual) and a procedure for resolution of disputes, and

“(II) procedures by which all accounts established are reported to the Secretary to ensure compliance with this clause,

“(vii) permits, not less frequently than once per year, for an account to be moved from one State program to another or between a State program and the Federal 401Kids Account Program, and

“(viii) ensures that such 401Kids Savings Accounts are invested in accordance with prudent investment strategies which are in the best interest of eligible individuals.

“(B) Collective account—For purposes of subparagraph (A), a State may establish a collective account for all eligible individuals in the State which is owned by the State, but only if—

“(i) the State program provides for separate accounting for each such individual,

“(ii) allows such account to receive contributions described in subparagraph (A)(iv), and

“(iii) if such account does not permit contributions by persons other than the State or the Secretary, permits for the establishment of a linked account under the program which accepts contributions by such other persons as provided in subparagraph (A)(iii) and which is aggregated for purposes of any limitation under this section with the amounts credited to the eligible individual in the State collective account.

“(C) Certification—A program of a State shall not be treated as a 401Kids Account Program unless such program is certified by the Secretary as meeting the requirements of this subsection.

“(3) Limitations

“(A) Contribution minimum—A 401Kids Account Program may establish minimum amounts for initial and additional contributions to a 401Kids Savings Account, not to exceed $10.

“(B) Contribution limitation

“(i) In general—Contributions to a 401Kids Savings Account under a 401Kids Account Program during any taxable year (other than contributions made under section 3(b)(4) or 3(b)(5) of the 401Kids Savings Account Act of 2024) shall not be accepted to the extent such contributions exceed $2,500.

“(ii) Inflation adjustment—In the case of any calendar year after 2024, the $2,500 amount in clause (i) shall be increased by an amount equal to—

“(I) such dollar amount; multiplied by

“(II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year, determined by substituting “calendar year 2023” for “calendar year 2016” in subparagraph (A)(ii) thereof.

“(C) Limitation on participation—Within a reasonable amount of time before the date an eligible individual attains age 17, the program shall provide notice to the eligible individual and the parent or guardian of the eligible individual that—

“(i) no deposits under paragraph (4) or (5) of section 3(b) of the 401Kids Savings Account Act of 2024 will be made for calendar years after the year in which the individual attains age 18,

“(ii) any contributions made by any person after the date the individual attains age 18 will be taken into account as provided in subparagraph (F), and

“(iii) the individual may elect to have the account balance rolled over or distributed as provided, and at the time specified, in paragraph (4).

“(D) State contributions—The State establishing or maintaining a 401Kids Account Program may make contributions under such program to accounts established or maintained thereunder. Such contributions—

“(i) shall not be taken into account for purposes of subparagraph (B), and

“(ii) may be limited to eligible individuals residing in the State at the time the contribution is made.

“(E) Coordination with amounts contributed for qualified higher education expenses

“(i) In general—Contributions to a qualified tuition program which are not contributed to a 401Kids Account Program shall not be taken into account under subparagraph (B), and contributions to a 401Kids Account Program shall not be taken into account for purposes of subsection (b)(6).

“(ii) Transfers from qualified tuition program—Amounts contributed to a qualified tuition program (other than to a 401Kids Account Program which is part of such qualified tuition program) may be transferred to a 401Kids Savings Account established under a 401Kids Account Program on behalf of the designated beneficiary, subject to the limitation of subparagraph (B). For purposes of such limitation, any such transfer in a taxable year shall be aggregated with any other contributions to such 401Kids Account program (other than contributions made under section 3(b)(4) or 3(b)(5) of the 401Kids Savings Account Act of 2024).

“(F) Amounts contributed after age 18—Any contribution by any person to a 401Kids Savings Account after the date the individual on whose behalf the account is established attains age 18 shall be treated for purposes of section 408A(c)(2) as a contribution to a Roth IRA maintained for the benefit of the individual, and no such contribution shall be accepted to the extent such contribution, when aggregated with all contributions for the taxable year to all Roth IRAs maintained for the benefit of the individual, exceeds the limitation of section 408A(c)(2).

“(4) Distributions

“(A) In general—Amounts in a 401Kids Savings Account under a 401Kids Account Program—

“(i) if such amounts are held in a collective account owned by the State, may be rolled over into a linked account under the program which accepts contributions by persons other than the State, or merged with such an account previously established, after the date the individual on whose behalf the account was established attains age 18 (or earlier as permitted by the State program), and

“(ii) after the date the individual on whose behalf the account was established attains age 18, may be—

“(I) distributed to such individual in cash,

“(II) transferred directly to an eligible educational institution, mortgagee, lender, or guarantor with respect to an expense described in subparagraph (E)(i), or

“(III) contributed in a direct transfer to an ABLE account (as defined in section 529A(e)(6)) or a Roth IRA of the individual, and

“(iii) if the individual whose behalf the account was established does not elect to receive any such distribution, shall remain in the account.

“(B) Treatment of distributions—No amount shall be includible in gross income under subsection (c)(3)(A) by reason of any cash distribution from an account under a 401Kids Account Program which is made after the date the individual on whose behalf such account was established attains age 18, to the extent such distribution does not exceed the qualified expenses of the individual which are paid or incurred during the taxable year of the distribution.

“(C) Treatment of rollovers

“(i) ABLE accounts—Any contribution from a 401Kids Account Program to an ABLE account pursuant to subparagraph (A)(ii)(III) shall be treated—

“(I) as a contribution from another ABLE account as described in section 529A(c)(1)(C)(i), and

“(II) as having been contributed to such ABLE account in a direct trustee-to-trustee transfer within 60 days of the distribution for purposes of such section.

“(ii) Roth IRAs—Any contribution from a 401Kids Account Program to a Roth IRA pursuant to subparagraph (A)(ii)(III) shall be treated—

“(I) as a contribution from another Roth IRA as described in section 408A(e)(1)(A), and

“(II) as having been contributed to such Roth IRA in a direct trustee-to-trustee transfer within 60 days of the distribution for purposes of section 408(d)(3), and

“(D) Additional tax on nonqualified use

“(i) In general—The tax imposed by this chapter for the taxable year shall be increased by an amount equal to 10 percent of the amount of any distribution from an account under a 401Kids Account Program during the taxable year which is not described in subparagraph (A)(i), (A)(ii)(II), (A)(ii)(III), or (B).

“(ii) Distributions from Roth IRA—If any amount is contributed to a Roth IRA in a rollover distribution from an account under a 401Kids Account Program pursuant to subparagraph (A)(ii)(III), the tax imposed by this title for the taxable year shall be increased by an amount equal to 10 percent of the amount of any distribution from such Roth IRA which is made within the 5-year period beginning on the date of the rollover—

“(I) to the extent that such distribution from the Roth IRA, when aggregated with all other distributions from such Roth IRA during such 5-year period, does not exceed the amount contributed in such rollover distribution, and

“(II) unless the qualified expenses of the individual on whose behalf the account was established paid or incurred during the taxable year of the distribution are equal to or exceed the amount of such distribution.

“(iii) Coordination rule—Subsection (c)(6) shall not apply to any amount with respect to which a tax is imposed under clause (i) or (ii).

“(iv) Federal 401Kids Account Program

“(I) In general—The tax imposed by this chapter for the taxable year shall be increased by an amount equal to 10 percent of the amount of any distribution during the taxable year from an account under the Federal 401Kids Account Program established by section 3 of the 401Kids Savings Account Act of 2024 which is not described in subsection (c)(1)(A)(ii), (c)(1)(A)(iii), or (c)(2)(A) of section 3 of such Act.

“(II) Distributions from Roth IRA—The tax imposed by clause (ii) shall apply to a rollover distribution from an account under the Federal 401Kids Account program pursuant to section 3(c)(1)(A)(iii) of the 401Kids Savings Account Act of 2024 in the same manner as a rollover distribution from an account under a 401Kids Account Program pursuant to subparagraph (A)(ii)(III).

“(E) Qualified expenses—For purposes of this paragraph—

“(i) In general—The term qualified expenses means amounts paid or incurred by an individual—

“(I) as payment or collateral required for a loan guaranteed by the Small Business Administration or the United States Department of Agriculture Rural Development or other small business loan as determined by the Secretary, pursuant to the rules determined under clause (iii),

“(II) as qualified acquisition costs (as defined in section 72(t)(8)(C)) with respect to a residence intended to be the primary residence of the individual,

“(III) for qualified higher education expenses of the individual at an eligible educational institution, or for other post-secondary educational expenses in an accredited degree-granting program or expenses for obtaining a trade certificate, as provided by the Secretary in consultation with the Secretary of Education, or

“(IV) after the date the individual on whose behalf the account was established attains age 59½, for any purpose.

“(ii) Certification—Except in the case of qualified expenses described in clause (i)(IV), the individual shall certify on the return of tax, in such manner as the Secretary shall prescribe, the qualified expenses paid or incurred by the individual during the taxable year.

“(iii) Small business loans—The Secretary shall prescribe rules or other guidance, or shall certify a process, for determining whether a loan shall be taken into account under clause (i)(I).

“(5) Eligible individual—For purposes of this subsection—

“(A) In general—The term eligible individual means a child who has not attained age 18 and is a citizen of the United States.

“(B) Treatment as designated beneficiary—The rules of subsections (a) through (e) shall be applied (except as otherwise provided in this subsection) by treating the eligible individual on whose behalf a 401Kids Savings Account under a 401Kids Account Program is established as the designated beneficiary with respect to such account.

“(6) State—For purposes of this subsection, the term State includes the District of Columbia, any possession of the United States, and any Indian tribe (as defined in section 45A(c)(6)).

“(7) Accounts may not be assigned—An account established on behalf of an individual under a 401Kids Account Program may not be pledged or assigned to any other person.

“(8) Third-party contractors—A State may contract with a third party for purposes of administration of a 401Kids Account Program, including record keeping and account investment.

“(9) Account management

“(A) In general—Except as provided in subparagraph (B)—

“(i) the eligible individual on whose behalf a 401Kids Savings Account under a 401Kids Account Program is established, after the date the individual attains age 18, shall have sole discretion over the distribution of amounts in the account, and

“(ii) in the case of an account not owned and controlled by a State, such eligible individual, after the date the individual attains age 18, and the parent or guardian of such individual before such date, may exercise control over the investment of account assets other than amounts attributable to deposits under paragraph (4) or (5) of section 3(b) of the 401Kids Savings Account Act of 2024 (including any gain or loss attributable thereto).

“(B) Death of account beneficiary—In the event the individual on whose behalf a 401Kids Savings Account under a 401Kids Account Program is established dies before attaining age 18—

“(i) any amounts attributable to deposits under paragraph (4) or (5) of section 3(b) of the 401Kids Savings Account Act of 2024 (including any gain or loss attributable thereto) shall be returned to the Treasury, and

“(ii) the successor owner or beneficiary of the account shall withdraw all amounts not returned under subparagraph (A) not later than the last day of the calendar year after the calendar year in which the death occurs.”

“(23) Disclosure of return information for purposes of administration of 401Kids Account Programs—The Secretary shall disclose to any officer or employee of the Department of the Treasury, as necessary for the administration of the Federal 401Kids Account Program established under section 3(a) of the 401Kids Savings Account Act of 2024 and the requirements of paragraphs (4) and (5) of section 3(b) of such Act, return information relating to taxpayer identity, dependents, adjusted gross income, and whether the taxpayer has claimed the earned income credit under section 32 for the taxable year.”

“(xiv) The Secretary of the Treasury, for purposes of the Federal 401Kids Account Program established under section 3(a) of the 401Kids Savings Account Act of 2024, and any State that elects to establish a 401Kids Account Program pursuant to section 529(f) of the Internal Revenue Code of 1986, are authorized to collect and use the names and social security account numbers of individuals as required to establish and maintain such accounts.”