By now, you've probably heard about the Trump Accounts. And the headline-maker seems to be the $1,000 in seed money available to all babies born between 2025 and 2028.
But how will these new investment vehicles actually work? And how should they fit into your kid’s financial future, if at all?
Here’s what we know: Trump Accounts are a new type of tax-deferred investment account for kids. They’re part of the newly approved budget bill (aka One Big Beautiful Bill,) and the idea is to kick-start each kid’s financial security as soon as they leave the womb.
While newborns are the only ones eligible for the one-time $1,000 from the government, anyone under 18 with a Social Security number can have a Trump Account.
Parents, relatives, and even employers will be able to contribute up to $5,000 combined per year, with employer contributions capped at $2,500. Earnings will grow tax-free until they’re withdrawn, and there will be incentives for the accountholder to use the money for retirement, college tuition or buying a house for the first time.
Many of the details and logistics are still unclear (the accounts reportedly won’t be available until next July) but in the meantime, here are some of the pluses and minuses — and how they compare to other options you have for saving and investing, including
IRAs,
529 college savings plans, and
custodial brokerage accounts.
Yay: You get $1,000. If you’ve got a qualifying newborn, the free money is what makes the Trump Accounts different from any other investment account.
Nay: Earnings get taxed upon withdrawal. While the money in a Trump Account can grow tax-deferred, your child will have to pay taxes on any earnings when they withdraw the money.
It would be taxed at a potentially lower rate (the rate for long-term capital gains rather than ordinary income) if they use it for a qualified expense such as college tuition, business loans or a first-time home purchase, but with a 529 plan, your child wouldn’t pay any federal taxes (and generally no state taxes) on earnings as long as the money is used for education.
In fact, among the current slate of tax-advantaged investment accounts available to Americans, the Trump Accounts are pretty restrictive, according to the Tax Foundation. Here’s a
side-by-side comparison.
Yay: Employers can kick in. Employers will be allowed to contribute cash for your kid, and it won’t count as part of your income. If this catches on as a
trendy retention tool,
with companies like Dell already pledging their support, parent-employees might be motivated to open Trump Accounts for their kids just to get the free company cash.
Nay: Parents don’t get tax breaks for contributing. You may be wondering what’s in it for you if you contribute to your kids’ Trump Accounts. Unlike with many retirement accounts, parents won’t get a tax deduction on their contributions. FYI: 529 plan contributions aren’t deductible on your federal income tax either, but can sometimes be claimed
at the state-level.
Yay: Families could catch the investment bug. A $1,000 headstart could motivate families who aren’t already investors to become investors. And that could help grow generational wealth.
Nay: Investment choices are more limited. With Trump Accounts, you can only invest in U.S.-based mutual funds and ETFs. Custodial brokerage accounts, on the other hand, offer more investment choices (for example, bonds and individual stocks.) And although there aren’t any tax benefits with custodial accounts, they don’t face the same early-withdrawal penalties or restrictions that Trump Accounts will.
So what? For newborns, a Trump Account is a no-brainer. Just the initial $1,000 could theoretically turn into enough for a down payment on a house by the time your child is 40, depending on how the investments do. (If that initial $1,000 earned 7% a year, they’d have
nearly $15,000 after 40 years.)
Otherwise, though, take some time to investigate Trump Accounts further as more details are announced. Capitalizing on more than one investment vehicle for your kids is great if you can swing it. But if you have limited dollars to invest, you may want to put this one lower on your priority list.
Related Reading
Trump Accounts: A New Way to Save for Your Child’s Future (SavingforCollege.com)
Read This Before Putting Any of Your Own Money Into One of Those Trump Accounts for Babies (MarketWatch via MSN)
Creating an Investment Plan for Your Child (SoFi)
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