Trump Accounts: What Parents Need to Know

The One Big Beautiful Bill Act of 2025 created a new type of savings account for kids called a “Trump Account.” If you have children or grandchildren, you’ve probably heard about it. Here’s what you need to know, and why the decision isn’t as simple as it might seem.

What Is a Trump Account?

A Trump Account is a new tax-advantaged savings account that any child age 17 or under can have. Per the Trump administration, they will be able to be opened for children with a valid Social Security Number beginning July 4, 2026. Visit trumpaccounts.gov to learn more.

Here’s how it works. The contribution limit is $5,000 per year, rising with inflation starting in 2028. Parents, grandparents, employers, governmental entities, and even charities can all contribute. And when the child turns 18, standard Traditional IRA rules kick in. That means the usual IRA contribution limits apply, and withdrawals before age 59½ are subject to a 10% penalty unless an exception applies. The account can also be rolled over into a traditional IRA after the child turns 18.

The idea is to give kids a head start on retirement savings. Money invested early has decades to grow before they’d need it.

Free Money: Who Qualifies for the $1,000 Government Contribution

Children born between January 1, 2025 and December 31, 2028 are eligible for a $1,000 one-time contribution from the U.S. Treasury. But it’s not automatic. A parent has to opt in at trumpaccounts.gov or by filing the new Form 4547 with their taxes. Once the election is complete, the Treasury will provide instructions to activate the account.

If your child qualifies, it makes sense to open the account even if you don’t plan to add your own money, so that your child at least gets the $1,000 contribution.

Employers can also contribute up to $2,500 of the annual $5,000 limit. If that’s available to you, that’s another reason to open one.

The Tax Side: Where It Gets Complicated

Trump Accounts are tax-deferred, meaning the account owner doesn’t pay taxes on the growth each year, but they will pay taxes when the money comes out in retirement.

Individual contributions are after-tax, meaning you’ve already paid income tax on that money before putting it in. This is called your “basis.” When the money eventually comes out, only the growth is taxable, not your original contributions.

But here’s the problem: you need to keep track of that basis using IRS Form 8606, and you need to file it every year there’s after-tax money in the account, not just the year you contribute. If you don’t, the IRS will likely assume the entire withdrawal is taxable, even if part of it shouldn’t be.

What about Roth conversions? Once the child turns 18, it’s possible to convert the account to a Roth IRA, which would make future growth tax-free. That sounds appealing, but if the child is still being claimed as a dependent on their parents’ taxes, the “kiddie tax” rules apply. That means most of the converted pre-tax amount could get taxed at the parents’ tax rate, which will likely be higher than the child’s rate. This makes early Roth conversions of Trump Accounts potentially less attractive.

The Downside: All That Growth Will Eventually Be Taxed

Here’s the thing about decades of tax-deferred growth: it’s great while it’s happening, but eventually all that money comes out as taxable income in retirement. And even though some of the original Trump Account will contain non-taxable basis, by the time the child reaches retirement age, the basis amount will likely be tiny compared to the pre-tax growth, meaning most of the withdrawals will be taxable.

This is the same challenge many people face with large traditional IRAs. When they kick in later in life, Required Minimum Distributions can push retirees into higher tax brackets, sometimes at the worst possible time. A Trump Account opened for a child today could grow into a substantial account by retirement, which is the goal. But it’s worth knowing that a future tax bill comes with it.

Are There Better Options?

Trump Accounts aren’t the only way to save for kids. Two alternatives are worth considering.

529 Plans are designed to pay for education, including college, graduate school, and some K-12 costs. One useful feature also opens a door to at least partial retirement savings for the child: currently, up to $35,000 of unused 529 funds can be rolled over into a Roth IRA (subject to certain limitations). That kind of tax-free move isn’t possible with a Trump Account conversion to a Roth IRA, where the pre-tax portion would be taxable. So if helping with education costs is the main priority, a 529 may make more sense.

Taxable Custodial Accounts (UGMA/UTMA) are regular investment accounts held in a child’s name and managed by an adult custodian until the child reaches the age of majority in their state. There are no contribution limits, and the money can be used for anything: college, a first home, starting a business.

Despite being taxable, these accounts can actually be very tax-efficient for kids. In 2026, the first $2,700 of investment income each year is either tax-free or taxed at the child’s low rate (this threshold is adjusted periodically). That means that if the child has no other income, the first $2,700 of investment income is effectively taxed at 0%.

This creates a window to lock in investment gains at a 0% federal tax rate each year, a strategy called “harvesting” capital gains. For example: say your child’s account holds an S&P 500 Index fund that has grown from $1,000 to $1,500. You sell it, locking in that $500 gain tax-free, then buy it right back at $1,500 (depending on price fluctuations). Now when your child eventually sells that investment in the future, they’re only taxed on gains above the higher basis of ~$1,500, not the original $1,000. Do this every year, and you can potentially save thousands of dollars in future taxes.

One thing to watch: taxable custodial accounts count as assets on the FAFSA, which can reduce financial aid eligibility. Trump Accounts, as retirement accounts, are generally excluded from that calculation.

So Which One Is Right for Your Family?

It depends on your goals. If your child qualifies for the $1,000 Treasury contribution or your employer offers to contribute, consider signing up for a Trump Account. It’s essentially free money. If paying for college is the main goal, a 529 is likely a better fit. If you want flexibility to use the money before retirement, a taxable custodial account deserves a close look. For many families, some combination of accounts will make the most sense.

The Bottom Line

Trump Accounts can be a useful tool, especially if you’re getting free contributions. But they’re not automatically the right choice for every dollar you want to set aside for a child. The tax tradeoffs are real, and the right answer depends on your family’s specific situation.

What matters most is simply starting to save. A child who has money invested at age 5 is in a much better position than one who starts at 25, regardless of which account type is used.

If you’d like to talk through what makes sense for your family, reach out to us for a complimentary consultation.

This information is based on current law as of July 2025. Tax laws can change, and individual situations vary. Please consult with your tax advisor for guidance specific to your circumstances.

Some Trump Account rules and regulations are still forthcoming from the U.S. Treasury and IRS. Annual contribution limits and other restrictions apply. Annual contribution limits and other restrictions apply.

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.