Summary/TL;DR
Trump Accounts will be established by the Federal Government for every American child born between January 2025 and December 2029 with an initial $1,000 contribution. Additional annual contributions of $5,000 are allowed until the child’s age 18. Investments must be made in a stock index fund and will become available to the child in various degrees at different stages of their lives. As long as distributions are considered “qualified”, growth will be taxed as long-term capital gains. When compared to alternatives such as ordinary brokerage accounts or 529 Savings Plans, Trump Accounts fit somewhere in the middle in terms of tax-efficiency and flexibility.
Introduction
One of the more interesting aspects of the One, Big, Beautiful Bill passed by Congress and signed by President Trump this month is the introduction of “Trump Accounts” for American children.
Today’s post will discuss everything you need to know about Trump accounts, including how they compare to alternatives already available to parents.
Trump Account Basics
“Trump Accounts” will be established for every American child born between January 2025 and December 2029. They will be seeded with an initial contribution of $1,000 from the federal government and allow subsequent annual contributions of $5,000 (including $2,500 from one’s employer) until the child’s age 18. Children born before or after this timeframe who are under 18 can still have an account opened for them, but they’ll be ineligible for the initial $1,000 investment from the government.
Funds within the account must be invested in a stock index and only become available to the child in stages throughout their life. First, at their age 18, up to half of the account becomes available for “qualifying” expenses such as starting a business, first-time home purchases, or attending college. At age 25, the child can withdraw the remainder of the funds for these same reasons, and at age 30 and beyond for any reason.
Taxation of Trump accounts are a bit unorthodox, essentially operating as a tax-deferred brokerage account with IRA-like penalties for non-compliance. Contributions are made on an after-tax basis and will grow tax-deferred. Once distributed, they will be taxed as long-term capital gains for “qualifying” purposes. For “non-qualifying” purposes, distributions will be taxed as ordinary income plus an additional 10% penalty.
Trump Account Examples
While the advantages of Trump accounts are modest compared to more flexible alternatives such as ordinary brokerage accounts, the initial $1,000 from the government is certainly welcomed. If the funds grew at 10% annualized, this modest beginning would grow to $5,500 at the child’s age 18, $10,800 at age 25, $17,450 at age 30, and $304,000 at age 60.
If the account were maximized with a $5,000 annual contribution and grew at 10% annualized, it would grow to $233,556 at the child’s age 18, $463,992 at age 25, $747,264 at age 30, and $13,039,305 at age 60.
Trump Accounts Versus Alternatives
Many professionals have been quick to point out that the advantages of Trump accounts are modest compared to other accounts already available for saving for one’s children such as 529 Savings Plans, UTMA accounts, and ordinary brokerage accounts. A brief comparison of each of these is below:
529 Savings Plans – Savings accounts that provide tax-free growth when the funds within them are used for “qualified education expenses”. There are no contribution limits. These are the most tax-advantaged, but the least flexible of the options available.
UTMA Accounts – Brokerage accounts which are automatically transferred to the minor’s full ownership at their age of majority (18, 21, or 25, depending on state law). There are no contribution limits and no tax benefits. These are the least tax-advantaged and still relatively inflexible. I never recommend UTMA accounts to my clients.
Brokerage Accounts – Ordinary investment accounts opened by parents that can be gifted or transferred to children at any time and in any amount the parent desires after the child becomes an adult. There are no contribution limits and no tax benefits. These are middle-of-the-road regarding tax-efficiency and top on the list when it comes to flexibility.
As can be seen, Trump accounts fall somewhere in the middle of tax-efficiency and flexibility when compared to alternative accounts. They lack the tax-efficiency of 529s but have far more flexibility. And they lack the full flexibility of brokerage accounts, but are slightly more tax efficient. Their contribution limit is also a limiting factor when compared to these other accounts. For these reasons, I expect the $1,000 provided by the government to be welcomed by everyone, but wouldn’t expect Trump accounts to be utilized far beyond that. The fact that one’s employer is allowed to contribute up to half of the annual maximum in an employee’s children’s Trump accounts is interesting and could present opportunities for a new standard for employee benefits.
