One of the most publicized features of the One Big Beautiful Bill Act (BBBA) is the so-called “Trump account.”
It was originally supposed to offer unique tax-advantages for young people to save for college, the purchase of a new home, or to start a new business.
But the final version of the account does away with many of these benefits, leaving the Trump account as basically a tax-deferred savings vehicle that parents and other entities can fund with after-tax contributions during the first 18 years of a child’s life.
How is the account established?
According to the BBBA, a Trump account can be established for any child who will be under the age of 18 from January 1, 2025 to December 31, 2028.
For children born in 2025, 2026, 2027 and 2028, the federal government will "seed” each account with an initial $1,000 contribution. Children under 18 born before then won’t receive this contribution, but their parents can still open an account and fund it on their own.
But how these accounts will be established isn’t clear yet. At the moment, only the U.S. Treasury will be allowed to open these accounts, and only after the parent has verified the identity of the child.
At the moment, it appears that these will be custodial accounts (like a Uniform Transfers to Minors Act account) that parents have control over until the child turns 18.
While accounts can be opened starting on January 1, 2026, additional contributions can’t be made until on or after July 4 of next year.
How do contributions work?
Parents (or anyone else) can contribute up to a total of $5,000 per year up until the year the child turns 18. While several people can contribute, the combined total of all individual contributions cannot be higher than $5,000.
Employers can also make up to $2,500 in annual contributions to the account as well. These will not count as taxable income, but they will count toward the combined $5,000 contribution limit.
Other entities, including state and local governments and qualified charities, can also make contributions of up to $1,000 per year to these accounts. These won't count toward the $5,000 maximum limit, either. However, it’s uncertain whether the IRS will eventually limit these combined “institutional” contributions.
How is the money invested?
Contributions must be invested in a low-cost U.S. broad index stock fund or ETF. There are no clear directions as to how a particular fund will be chosen. It’s also not clear whether these accounts will charge maintenance or servicing fees.
When can money be withdrawn?
Earnings will grow tax-deferred until withdrawn. Withdrawals can be made starting the first day of the calendar year in which the child turns 18. Tax treatment follows the same rules as those for Traditional IRAs:
- Withdrawals of earnings are treated as ordinary income.
- A 10% early withdrawal penalty will be applied to distributions taken before age 59½.
- The early withdrawal penalty may be waived if the withdrawal is used to pay for qualified expenses, such as higher education costs, the purchase of a first home, or to recover from qualified federally declared disasters.
It isn’t clear yet whether contributed principal can be withdrawn from the account tax-free.
What is the account good for?
That’s the question. Unless parents, relatives, employers or other entities make annual contributions, its potential as a retirement or major purchase savings vehicle is limited.
Let’s take a hypothetical example. If no contributions beyond the initial $1,000 government seed were made when the child was born, the account would only grow to around $2,693 when they turned 18, assuming an annual 6% rate of return.
Better college savings vehicles are available
As a higher educational savings vehicle, it’s doesn’t compare favorably to 529 College Savings Plans.
Unlike Trump accounts, there are no limits on how much parents or grandchildren can contribute to a child’s 529 plan account, although there may be a maximum total aggregated contribution amount per beneficiary, depending on the plan.
And since all distributions from 529 plans are tax-free if used to pay for qualified educational costs, it offers better tax advantages than a Trump account.
One added plus: If the child doesn’t use all of the money in their 529 plan account for college, up to $7,000 per year (up to a lifetime maximum of $35,000) can be rolled over tax-free into a Roth IRA.
Better retirement savings options are available
The Trump account doesn’t offer better tax advantages than a Traditional IRA. Contributions are not tax-deductible, yet earnings are taxable when withdrawn. And owners need to start taking annual Required Minimum Distributions (RMDs) when they’re 75.
When a child starts earning money, a Minor Roth IRA may be a better alternative,
Why? Because the child (or their parent) can make annual after-tax contributions equal to the total income earned by the child during the year (up to $7,000 maximum).
At age 18, the account reverts to an “adult” Roth IRA owned solely by the child. He or she will never pay taxes or penalties on withdrawals they make after age 59½. And they’ll never have to take RMDs.
More flexible, tax-advantaged investment vehicles are available
Given that all of the money in the account must be invested in a single broad-based index fund, the Trump account doesn’t offer the risk-mediating benefits of diversification.
If, for example, a bear market drives down the value of the account by 30% during the year the child turns 18, they will have that much less money available to pay for college.
It also may not offer better tax advantages than other kinds of taxable accounts. Brokerage accounts allow you to use tax-loss harvesting to reduce investment taxes. And Uniform Transfers to Minors Act accounts let you employ cost-basis step-up strategies to reduce realized gains that could otherwise result in kiddie taxes.
How might a Trump account be used by parents?
For parents who have already established 529 plans or Minor Roth IRAs for their children and also want to give them a head start on saving for retirement or other non-educational purposes, a Trump account may be a good supplemental savings option if they (or their employers) are able to contribute significantly to the account over time.
It also appears that when the child turns 18, their Trump account essentially becomes a Traditional IRA, and the rules regarding contributions, investments and rollovers most likely will follow those of IRAs. However, some of these rules haven't been fully clarified.
Until these issues are settled, parents must be willing to accept the higher level of risk of a non-diversified account whose value will be determined solely by the whims of the stock market.
Future challenges
There are many unanswered questions about Trump accounts that need to be resolved before they officially “launch” in 2026. It’s also possible that Congress or the IRS may modify some of the features before then.
It’s also important to remember that the finalized features of Trump accounts will only be in effect until the end of 2028. Future Congressional and presidential administrations may choose to change the terms of the program or eliminate it entirely.
If such changes are made, it’s most likely existing accounts will be “grandfathered.” However, parents may still want to weigh the pros and cons of establishing or contributing to a child’s Trump account, especially when other, more established savings vehicles are available.
This material has been provided for general informational purposes only and does not constitute tax or investment advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult with a tax professional on any tax-related issues.
This article was authored by David Jaeger and Jeffrey Briskin. David is a financial advisor with Canby Financial Advisors, a SEC-registered investment adviser. SEC registration does not constitute an endorsement by the SEC nor a statement about any skill or training. David can be reached at 508.598.1082 or djaeger@canbyfinancial.com. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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