Expecting A Baby? Here Is What To Know About Trump Accounts

A provision of the 2025 HR 1 federal budget bill (aka “One Big Beautiful Bill”) allows new parents to receive $1,000 for newborns in “Trump Accounts”. Every new parent should take advantage of this because it is free money, and after all, no one should turn down free money. But Trump Accounts are complicated and add even more complexity to an already hopelessly complex federal tax code. Ultimately, a Trump Account is basically a traditional IRA for a newborn child and the U.S. government contributes the first $1,000 to it. However, parents are better off contributing their own money to other types of investments for their children’s futures

What is a Trump Account?

In short, the U.S. government will contribute $1,000 to newborns and that money grows until adulthood at which time the money can be withdrawn. But there are a lot of caveats. There are also many uncertainties about how these funds will work so we should expect either congress or the IRS to tweak the Trump Account rules over the next year. Here are the details:

1. Trump Accounts will apply to any child born on or after January 1, 2025. However, the program will not roll out until 12 months after H.R. 1 was enacted. This means that no Trump Accounts will actually be created until July 2026. Therefore, we have a year to digest the wording of the “One Big Beautiful Bill” before we actually have to open and manage Trump Accounts, even for those children born in calendar year 2025.
2. Only children born between 2025 – 2028 are eligible to receive the $1,000 initial contribution from the federal government. Once a newborn who is a U.S. citizen gets a social security number, the federal government will automatically enroll that newborn and allocate $1,000 toward that child’s Trump Account. Parents must go to their bank or other financial institution to activate that account and claim the $1,000.
3. Parents can contribute up to $5,000 of their own money per year to their child’s Trump Account. This is after-tax money and these contributions are not tax deductible.
4. Parents can open a Trump Account for any child under age 18 but the federal government will only contribute the $1,000 to Trump Accounts for children born in 2025, 2026, 2027, and 2028. Parents can contribute up to $5,000 of their own after-tax money to Trump Accounts for children who are under age 18 but born in 2024 or earlier.
5. The money in the account can only be invested in a broad index U.S. stock mutual fund with an annual expense of < 0.1% of the value of the account. An example would be an S&P 500 index fund. The money cannot be invested in any other type of investment until after the child turns 18 years old.
6. Employers can elect to contribute up to $2,500 to their employees’ children’s Trump Accounts as a fringe benefit. The combination of employer contributions and parent contributions cannot exceed $5,000 per year. Neither the employer nor the employee would have to pay taxes on these fringe benefit contributions. Note that self-employed persons and partners in a partnership are considered independent contractors rather than employees from an IRS standpoint. Thus, the language of H.R. 1 indicates that self-employed persons and partners in a partnership would not be eligible to make the up to $2,500 pre-tax contributions to their children’s Trump Funds as employers. Instead, they can only make the up to $5,000 after-tax contributions as parents.
7. The money in the Trump Accounts grows tax-deferred, meaning that the individual does not have to pay any tax on annual interest, dividends, or capital gains as long as the money remains in the account.
8. There are several withdrawal rules:
   • Money may not be withdrawn before age 18.
   • Withdrawals are taxed at the individual’s regular federal income tax rate.
   • After age 18, withdrawals can be made without penalty for education expenses (unlimited) and for purchase of a first-time home (up to a $10,000 limit). Otherwise, the Trump Accounts function like a traditional IRA with withdrawals before age 59 1/2 subject to IRS early withdrawal penalties (currently at 10% of the amount of the withdrawal). This penalty is in addition to the income tax rate applied to those early withdrawals. There are several other exceptions to the 10% penalty such as birth or adoption expenses ($5,000 limit), death, disability, federally-declared disaster losses, and health insurance premiums while unemployed.
   • For money contributed by parents, the basis is not taxed but the gains are taxed at the individual’s income tax rate when the money is withdrawn. The basis is the amount of the original contribution by the parents (or employer). This is similar to a traditional IRA that has been funded with both pre-tax contributions and after-tax contributions. Importantly, this requires you to keep careful records of any annual parental or employer contributions so that when money is ultimately withdrawn, the amount of those withdrawals that are taxable can be determined. Not only that, but those records must be given to the child when he or she becomes an adult since when the child takes withdrawals 20, 30, or 70 years from now, that child will need to know what amount of the withdrawals is taxable and what amount is not taxable.

Is a Trump Account better than a 529 plan account to save for a child’s college education?

The short answer is absolutely not! Yes, you should accept the $1,000 government initial contribution but no, you should not contribute your own money into the Trump Account to save for college. There are several reasons why:

1. Trump Account withdrawals get taxed. When you withdraw money from a 529 plan for educational expenses, it is not taxed. That means that there is more money to go toward college expenses than with a Trump Account.
2. Trump Account assets cannot be diversified. An important tenet of investing is diversification with a mixture of different types of investments and that mix changes as the investment horizon changes. Ideally, an investment portfolio should consist of U.S. stocks, foreign stocks, U.S. bonds, foreign bonds, and real estate. If you won’t need the money for a long time (more than about 15 years), then the portfolio should be heavily weighted toward stocks. If your investment horizon is shorter, then the portfolio should be weighted more heavily with bonds. In a 529 plan, you would normally start off the account mainly invested in stocks when the child is born and then gradually increase the amount invested in bonds as the child gets older. By age 18, it should mostly be in bonds and money markets with very little in stocks. Trump Accounts can only be invested in broad U.S. stock market index funds until the child turns 18.
3. You lose parental control of the money. In a 529 plan, the parent is the custodian of that account and can control distributions, thus preventing junior from taking the money out to buy a new Corvette rather than pay his college tuition. Once a child turns 18, that child can take the money out of a Trump Account to buy that new Corvette (but has to pay income tax plus the 10% early withdrawal penalty).
4. Trump Accounts cannot be rolled over into a Roth IRA. If there is money left over in a child’s 529 plan after the child graduates from college, the residual balance can be rolled over into a Roth IRA belonging to that child and those rollovers are not taxed. There are some rules, such as the 529 plan must have been opened for at least 15 years and there cannot have been new contributions for the past 5 years. There are also rollover limits of $7,000 per year with a total lifetime limit of $35,000. Because Trump Accounts are similar to a traditional IRA, they can be converted into Roth Accounts but that conversion is taxed at a person’s regular income tax rate. In other words, a rollover from a 529 plan is not taxed but a conversion from a Trump Account is taxed.
5. Trump Accounts cannot be transferred to another child. I had a 529 plan account for each of my four children. Every time one of them graduated from college, I transferred the balance into the other children’s accounts. You can also transfer residual balances into a grandchild’s 529 account. Trump Accounts are not transferable.
6. No state income tax advantages for Trump Account contributions. Many (but not all) states offer tax incentives for residents to contribute to 529 plans. For example, here in Ohio, we can deduct up to $4,000 from our state income taxes each year for contributions made to each child’s Ohio 529 plan. With four children, my wife and I were able to deduct a total of $16,000 from our state income taxes every year by contributing to their four 529 accounts. And now, we keep getting to take state income tax deductions for contributions to our grandchildren’s Oho 529 plans. There is no state income tax advantage to contributing to Trump Accounts in any states (at least as of now).

Is a Trump Account better than a uniformed gift to minors account?

The answer is an emphatic… maybe. Under the uniform gifts to minors act (UGMA) and the uniform transfers to minors act (UTMA), a parent can deposit up to $19,000 (or $38,000 for a married couple combined) into a UGMA/UTMA account in their child’s name. Each year, unearned income from that account (interest, dividends, and capital gains) are exempt for the first $1,350, then taxed at the child’s income tax rate for unearned income between $1,350 and $2,700, and finally taxed at the parents’ income tax rate over $2,700 (aka, the “kiddie tax”). When the child reaches the age of majority (18 to 25, depending on the state), that money in a UGMA/UTMA account is the child’s do to whatever he or she wants to do with it.

1. Advantage Trump Account: The Trump Accounts grow tax-free whereas any annual unearned income greater than $1,350 in a UGMA/UTMA is subject to annual income tax.
2. Advantage UGMA/UTMA account: When money is withdrawn from a Trump Account, the withdrawals are taxed at the regular income tax rate. When money is withdrawn from a UGMA/UTMA account, the withdrawals are taxed at the capital gains rate. For the majority of Americans, the capital gains tax rate is lower than the income tax rate. And for single Americans with an annual income less than $48,350, the capital gains tax rate is 0%. This means that if that child is a college student with a negligible taxable income, he or she may pay no capital gains taxes at all on the withdrawals. Other advantages of the UGMA/UTMA accounts include:
   • Greater contributions limits ($19,000 per each parent for UGMA/UTMA vs $5,000 for both parents combined for Trump Accounts)
   • Ability to withdraw money before age 18
   • No penalty for early withdrawal before age 59 1/2 if not used for one of the IRS-approved early withdrawal exceptions.
   • Investment options not limited to broad index U.S. stock mutual funds.

Is a Trump Account better than putting money in the parents’ brokerage account?

Well… maybe. Many parents help pay for their children’s college education or their children’s wedding by paying out of the parents’ own investment accounts or checking accounts. Maybe the parents didn’t want to put money in a 529 plan because they think that their child will get full ride college scholarship. Of maybe the parents are reluctant to open a 529 account because they aren’t sure whether or not the child will even go to college. Is it better for the parent to contribute money to a Trump Account in their child’s name or contribute to a brokerage account in the parent’s name? The answer is… it depends.

1. Advantage Trump Account #1: The Trump account will grow tax-free whereas money in the parent’s brokerage account will generate taxable interest, dividends, and capital gains each year.
2. Advantage Trump Account #2: Withdrawals from the Trump account for IRS-approved exceptions to the 10% withdrawal penalty (such as education expenses or purchase of a new home) are taxed at the child’s regular income tax rate. Withdrawals from a parent’s brokerage account is taxed at the parent’s capital gains tax rate. If that child (now a young adult) has a low taxable income, for example as a non-working college student, then their income tax rate may be less than the parent’s capital gains tax rate.
3. Advantage parent’s brokerage account #1: If the goal is to fund something other than one of the IRS-approved exceptions to the 10% early withdrawal penalty, then withdrawals from the parent’s brokerage account will be taxed at their capital gains tax rate. On the other hand, withdrawals from the child’s Trump Account will be taxed at the child’s income tax rate plus the 10% early withdrawal penalty. In most cases, this will be higher than the parents’ capital gains tax rate. Just remember that the IRS gift limit is $19,000 per parent so if two parents are trying to fund their child’s $50,000 wedding, then they should either gift the child money over two years or arrange to pay the wedding venue, caterer, dressmaker, and limo driver directly from the parent’s checking account.
4. Advantage parent’s brokerage account #2: What if the parents’ are saving for the child’s wedding and the child decides to never get married? Or the parents are saving for the child to buy a new car and the child moves to a city where a car is unnecessary? If the parents put that money in a Trump Account intending it to be used for one of those purposes, then the child gets to keep the money to use for anything. If the parents put that money in their own brokerage account, then they could keep the money for themselves if there is no wedding or no new car.

Is a Trump Account better than a Roth IRA?

Absolutely no! If a child has earned income, for example from a summer job, then parents can open a custodial Roth IRA in the child’s name and contribute up to $7,000 of the child’s earned income each year. If your kid complains about you putting $7,000 of the money earned from babysitting into a retirement account, then just increase their allowance by $7,000 a year and it will be just as if you funded their Roth IRA and they get to spend the amount that they earned. If your purpose is to fund your child’s retirement, there are several advantages of contributing to a Roth IRA instead of a Trump Account.

1. Lower taxes on custodial Roth IRA contributions. Like a Trump Account, contributions to a Roth IRA are made in after-tax money, that is, money that you have already paid income tax on. For Trump Account contributions, the parents make contributions after paying income tax at the parents’ tax rate. But for a custodial Roth IRA, the contributions are made after paying the child’s income tax rate. Most teenagers earning money working at the pool or mowing lawns during the summer have such a low income that they pay little or no income tax.
2. More investment options for custodial Roth IRAs. Like 529 plans, custodial Roth IRAs can be invested in many different types of investments whereas Trump Accounts are limited to broad U.S. stock index mutual funds.
3. Potentially higher contribution limits for a custodial Roth IRA. The most a parent can contribute to a Trump Account is $5,000 per year. But a parent can contribute up to $7,000 of a child’s earned income each year to a custodial Roth IRA.
4. No tax on Roth IRA withdrawals. When a person takes withdrawals from their Roth IRA after age 59 1/2, there is no income tax on the withdrawals. Trump Account withdrawals are taxed at the person’s regular income tax rate.
5. No required minimum distributions for Roth IRAs. After age 73, traditional IRAs (and presumably Trump Accounts) are subject to annual required minimum distributions. Roth IRAs are not – the Roth IRA owner is not required to take some minimum amount out of the account each year.
6. And the child can still make withdrawals from the Roth IRA for college or a first home. You can withdraw money from a Roth IRA before age 59 1/2 for qualified exceptions to the 10% early withdrawal penalty. However, even if you have one of those exceptions, you would need to pay income tax on the withdrawals at your regular income tax rate (just like a Trump Account). In other words, early withdrawals from a custodial Roth IRA to pay for college tuition or the purchase of a first home are going to be taxed exactly like withdrawals from a Trump Account.

Is a Trump Account better than nothing?

Yes! The only reason to not open a Trump Account is if the name “Trump” causes you more than $1,000 worth of consternation. It is free money from the American taxpayers to your kid. By the time that child turns 18, that $1,000 will have grown to $4,000 at a compound interest rate of 8% per year and $6,000 at an interest rate of 10% per year to use for college expenses or for the purchase of a new home. If the child uses it like an IRA and waits to take the money out at age 65, then that $1,000 will have grown to $180,000 at 8% annual interest and to $650,000 at 10% annual interest. Think of the Trump Account as being a free traditional IRA just for being born an American citizen.

And if your employer offers to contribute to your child’s Trump Account, then by all means accept it. Once again, it is free money. Even if your employer requires you to match their contributions, it is still worth it to get free money. If your employer offers a $2,500 contribution each year, then by the time your child is 18, the account will grow to $100,000 at 8% annual interest and $125,000 at 10% annual interest. That will be enough to pay for 3 semesters at a public university 18 years from now. And if that 18-year-old child just leaves the $125,000 in the Trump Account until age 65, it will be worth a whopping $13 million at 10% annual interest! At 8% annual interest, the child would only have a “measly” $4.2 million.

But beware…

The banks and other financial institutions that administrate Trump Accounts are going to try to convince parents to add annual contributions of their own to their children’s Trump Accounts. Those financial institutions make their income by charging expenses on investment accounts. A total U.S. stock market index fund generally has an annual expense of about 0.04%. The Trump Funds permit a total annual expense of 0.10%. So if ACME Bank offers a Trump Fund invested in a total U.S. stock index fund with at 0.10%, then the banks stands to make a 0.06% profit each year on the invested money. ACME Bank is going to be highly motivated to get parents to contribute the maximum of $5,000 each year to their child’s Trump Fund because that is all the more profit for the bank. So, we can expect a lot of financial institutions to have advertising campaigns extolling the virtues of Trump Accounts starting next year and pressuring parents to contribute. For most American parents, DON’T DO IT.

And the bottom line is:

Take the free money from the government and activate a Trump Account for your child born in 2025, 2026, 2027, or 2028. And if your employer offers to put money in a Trump Account as a fringe benefit, take that free money, too.

But don’t make any parental contributions of your own to a Trump Account. If your goal is to fund their college education, then contributing to a 529 plan is far better. If your goal is to fund their retirement, then a custodial Roth IRA is far better. And if your goal is to help them start a business, pay for their wedding, buy a car, or buy a home when they are an adult, then a uniformed gift to minors act account is far better.

July 21, 2025