One feature of the One Big Beautiful Bill Act (OBBBA) is the Trump account, a new savings vehicle for children born in the U.S. For babies born from 2025 through 2028, the government will seed the account with a $1,000 initial contribution.
The Trump account rules under the new tax law are somewhat different from those proposed in the House legislation. The original proposal allowed beneficiaries to withdraw money at age 18 to fund educational expenses, buy a first home or fund a business startup without early withdrawal penalties, with all money treated as distributed by age 31.
Under the OBBBA, these accounts are more like IRAs, with a 10% penalty on withdrawals prior to age 59 ½.
How Do Trump Accounts Work?
Children born in the U.S. from Jan. 1, 2025, through Dec. 31, 2028, will receive $1,000 in their Trump account from the U.S. Treasury Department. There are no income requirements or limitations connected with these deposits. The children must have a Social Security number.
Also, parents and others can contribute up to $5,000 annually on an after-tax basis to these accounts. Employers can contribute up to $2,500 annually, to be counted against the $5,000 total. Employer contributions, however, do not count as gross income for the employee or the employer.
Contributions can be made through the calendar year in which the child turns 17.
Contributions can only be invested in qualified mutual funds that follow the S&P 500 or a few similar U.S. stock indexes. Expense ratios are limited to 0.1% of the balance of the money invested in the fund.
Trump Accounts and Taxes
The taxation of Trump accounts is complicated at best.
Withdrawals from a Trump account can be made beginning on Jan. 1 of the year the child beneficiary turns 18 and are taxed as ordinary income.
Since contributions from parents and others are made on an after-tax basis like a Roth IRA, the contribution amounts are not taxed upon withdrawal. Any earnings are taxable, however.
Withdrawals made prior to age 59 ½ are subject to a 10% early withdrawal penalty in most cases in addition to the taxes. The penalty is waived if the money is used for higher educational expenses or up to $10,000 for the purchase of a first home.
Taxation and penalties can get very complicated if the account includes a variety of contributions such as the $1,000 initial governmental contribution, employer contributions, contributions by the parents and earnings on the account. It is possible the tax rules will change before the accounts go live in 2026.
Advantages of Trump Accounts
Trump accounts offer another way for clients to save for their children’s future. The $1,000 governmental contribution is essentially free money, as are the employer contributions.Trump accounts are a vehicle to help children save for future needs such as college and retirement. If the child were able to convert the account to a Roth IRA once they turn 18, this could provide a good start on their retirement savings.
Tax and IRA expert Ed Slott writes that it is unclear whether this will be allowed and he hopes the IRS clarifies this soon.
Disadvantages of Trump Accounts
The disadvantages of Trump accounts seem to far outweigh the advantages.
First, there are few if any tax advantages if the child beneficiary wants to use the account to fund education.
Second, the requirement that the money be invested in stock-based index funds limits the ability of the account holder to diversify their portfolio. Rebalancing will not be a valid technique to limit risk.
The tax complications of the accounts are another disadvantage.
At the very least, parents should take any “free money” but should explore other options for goals like college before adding to a Trump account.
Better Options
For college savings, a 529 plan appears to be a far better option than a Trump account. These plans allow tax-free withdrawals at the federal level for qualified expenses such tuition, room and board, supplies and others.
Also, money in a 529 can be used to fund elementary, middle and high school costs in some cases up to certain limits. Money left in a 529 plan can be transferred to a Roth IRA for the beneficiary up to a lifetime $35,000 limit.
If parents want to get a child started on their retirement savings, they might consider opening a custodial Roth IRA for the child once they start earning money. These accounts offer tax-free growth and also a degree of flexibility if some of the money is needed prior to retirement.
Even a regular taxable brokerage account might be a better option for a child if for no other reasons than investment flexibility and easier access to the money if needed.
All three types of accounts will offer more flexible investment options than a Trump account and are much less complicated from a tax perspective.
Adjustments in the rules are possible in the future, but as they appear to be set up now, Trump accounts are likely not the best option for your clients.
One Advisor’s Issues With Trump Accounts
Veteran financial advisor Rick Kahler pointed out a number of potential issues with the Trump accounts in a recent blog post. He cites:
Minimal tax benefits. While money in a Trump account will grow tax-deferred, unlike with a 529 plan withdrawals for expenses like college would be taxed, he points out.
Overly complex. Kahler referred to the Trump accounts as a case of “government overengineering.” He points to a very complicated set of rules that include some harsh penalties if the withdrawals are not made for exactly the right use and in the right fashion.
Trump accounts don’t fill a gap in the marketplace. Kahler points out that there are already savings options in place that do what Trump accounts are supposed to do and that are easier to use.
He suggests that focusing on established strategies is more likely to give kids a real advantage, citing 529 plans, a Roth IRA and an expanded child tax credit as examples of vehicles that offer a real financial head start.
Kahler refers to the Trump accounts as “a financial dinosaur that belongs in a policy museum. It should be called the DINO Account, short for 'Definitely Irrelevant Needless Offering.'”
Credit: Chris Nicholls/ALM; Adobe Stock
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