By Tyler Schalch
A new savings account for children is getting plenty of attention, but it may not be the best first choice for every family.
Created to encourage long-term investing for children, these accounts allow families and other eligible contributors to begin investing before a child earns income. They may be particularly attractive for children who qualify for the federal government’s initial $1,000 contribution. However, families saving primarily for college may still find that a 529 plan offers more favorable tax treatment.
Who Qualifies for the $1,000 Contribution?
The federal government will provide a one-time $1,000 deposit for a child who:
- Was born between January 1, 2025, and December 31, 2028
- Is a U.S. citizen
- Has a valid Social Security number
- Has not already received the federal contribution
How to Open a Trump Account
Trump Accounts are not opened automatically. A parent or legal guardian must elect to establish the account on the child’s behalf. Visit TrumpAccounts.gov to review the process and access the official Trump Accounts app to get started.
How Trump Accounts Work
A Trump Account can be established for an eligible child under age 18 who has a valid Social Security number. Parents, grandparents, and others may contribute to the account even if the child has not yet earned income.
The Treasury Department refers to the period from the account’s opening through December 31 of the year before the child turns 18 as the growth period. During this period, the account must be invested in a low-cost fund that tracks a broad index composed primarily of U.S. stocks. The fund cannot use leverage, and its annual fees cannot exceed 0.1%.
Dividends, interest, and capital gains accumulate on a tax-deferred basis. Withdrawals are generally unavailable during the growth period.
Beginning January 1 of the year in which the child turns 18, the growth period ends, and the account is treated as a traditional IRA.
Taxation depends on the source of each contribution:
- Contributions from individuals: Money contributed by parents, grandparents, or other individuals is generally made with after-tax dollars. Those contributions typically are not taxed again when distributed, although any related investment growth is taxable.
- Government and charitable contributions: The federal government’s $1,000 deposit and certain contributions from governments or qualifying charitable organizations are generally taxable when withdrawn.
- Employer contributions: An employer may contribute up to $2,500 annually through an eligible program. Employer contributions are generally excluded from income when deposited, but are taxable when later distributed.
Individual and employer contributions generally share a combined annual limit of $5,000 per child. Certain eligible contributions from governments and charitable organizations may be excluded from that limit.
After the account transitions to a traditional IRA, distributions taken before age 59½ may be subject to an additional 10% tax. Exceptions may apply for qualified education costs, a first-time home purchase, and certain other permitted uses.
Potential Benefits
- Eligible children may receive the government’s $1,000 initial contribution.
- Families can begin investing before the child earns income.
- Investment gains are tax-deferred while they remain in the account.
- After-tax family contributions generally are not taxed again when withdrawn.
- Employers, governments, and eligible charitable organizations may contribute.
- The 0.1% fee cap helps keep investment expenses low during the growth period.
- Starting at a young age gives compounding more time to work.
Potential Limitations
- Contributions made by family members are not tax-deductible.
- Investment earnings are generally taxed as ordinary income when distributed.
- Government, employer, and certain charitable contributions are typically taxable upon withdrawal.
- Investment options are restricted during the growth period.
- Funds are generally unavailable before January 1 of the year the child turns 18.
- Distributions before age 59½ may trigger an additional 10% tax unless an exception applies.
- For children who do not qualify for the $1,000 deposit, the tax benefits may be less appealing than those offered by other accounts.
Why a 529 Plan Is Still Better for College
Families whose primary goal is paying for education may still prefer a 529 plan. Investment growth and withdrawals are generally free from federal income tax when used for qualified education expenses.
Depending on the state, 529 contributions may also qualify for a state income tax benefit. These plans typically allow substantially higher contributions and offer greater flexibility for education-related spending.
Unused 529 funds provide additional flexibility. The funds may be eligible for a future rollover to a Roth IRA for the beneficiary, subject to applicable rules and limits. Alternatively, the account owner may change the beneficiary to another eligible family member of the original beneficiary, generally without income taxes or penalties.
Trump Accounts receive tax-deferred growth, but their earnings are generally taxable when distributed, including when the money is used for college. A qualified education withdrawal may avoid the additional 10% tax, but it does not make the earnings tax-free.
The Bottom Line
Families with an eligible child should strongly consider opening a Trump Account to receive the $1,000 federal contribution.
Additional contributions require a closer comparison. Family deposits are made with after-tax dollars, while the account’s investment earnings are generally taxable when withdrawn. For savings intended specifically for education, a 529 plan usually offers stronger tax benefits and greater flexibility.
The clearest advantage of a Trump Account is the ability to invest for a child before the child begins earning income. Without the federal seed contribution, many families may be better served by prioritizing a 529 plan and later helping fund a Roth IRA once the child begins working.
More information can be found at TrumpAccounts.gov.