Since its inception on July 4, more than seven million children have signed up for a Trump Account. These accounts have already banked more money than most new savings programs due, in part, to the $1,000 federal seed deposit for babies born between 2025 and 2028. In a recently proposed guidance from the Treasury Department, funds might now be able to be contributed directly from paychecks on a pre-tax basis, and some employers might also be willing to match contributions. While it is a detail that is part of a much broader set of rules for these funds, it could quietly reshape who benefits most from the Trump Accounts. With billions in seed money and matching pledges already committed by philanthropists and corporations, this tax-treatment question could ripple across millions of accounts before children ever touch the funds.
What Trump Accounts Are, And How Contributions Are Taxed Today
A Trump Account (formally a Section 530A account) is a savings vehicle created by Congress under the One Big Beautiful Bill Act of 2025. The intention was to help children build wealth during their infancy so that once they become adults, they will have a nest egg to build upon.
As part of the program, every U.S. citizen born from 2025 through 2028 automatically qualifies for $1,000 of seed money. This money grows tax-deferred and can be invested in one of many pre-selected funds. Once the child turns 18, the account turns into a traditional IRA.
However, the seed money is only part of the funding for these accounts. Family, friends, and even employers can contribute up to $5,000 annually. This means that by the time a child turns 18, they can have as much as $91,000 in contributions to this account, not even factoring in the growth of the investments.
Some of the nuances of these accounts surround the tax treatment. Individual contributions are taxed once, as ordinary income, before the money ever reaches the account, so that principal comes out tax-free later, since the IRS already collected its share. Growth on those funds is a different story: any appreciation the account earns is taxed as ordinary income when it’s withdrawn, no matter how the original contribution was taxed going in.
Pre-tax contributions, like the $1,000 federal seed deposit, employer contributions, and payroll contributions, work differently. The money was not taxed on the way in; both the principal and the growth are taxed as ordinary income on withdrawal.
According to Forbes, Tuesday’s proposed guidance would extend that pre-tax treatment to a slice of individual contributions too, allowing employees to contribute funds directly from payroll, with employers permitted to also provide funds up to $2,500 on a pre-tax basis. More than 50 companies have already told Treasury they intend to participate.
What Pre-Tax Contributions To Trump Accounts Actually Means
A pre-tax contribution comes out of a paycheck before income taxes are calculated. This means that a taxpayer’s taxable income decreases. While lowering income may sound like a bad thing, when it comes to taxes, this is good as it means that the taxpayer will have lower income in the eyes of the IRS, and, therefore, will owe less in taxes.
Importantly, contributing money on a pre-tax basis does not eliminate the tax bill. Instead, it defers the tax burden until the child withdraws the money, likely decades down the road. This time-value of money benefit has the potential to yield significant tax savings.
In the short run, the tax savings will depend on the parent’s marginal tax rate. This means that the tax savings will vary substantially depending on the parent’s income level.
For example, consider a household with $400,000 in taxable income (35% federal tax bracket). If the parents contribute $5,000 pre-tax, their tax liability will be lower by that amount, yielding $1,750 in lower federal cash taxes paid than if the funds were contributed on an after-tax basis.
Now take a household earning $65,000 (12% federal tax bracket). If the same $5,000 were contributed on a pre-tax basis, the savings would only amount to $600. This lower tax savings is a function of the marginal tax brackets.
Pre-Tax Contributions To Trump Accounts Favor The High Earners
The math above points to a clear and striking wrinkle – the biggest tax benefit for this change will be delivered to families that are already making more money. This wrinkle comes on top of those families already being in the best position to contribute $5,000 annually to a Trump Account.
Furthermore, a Mercer poll found that only 4% of employers currently plan to offer a Trump Account contribution program. While it is not yet clear exactly who these companies are, it could point toward greater access among workers at large and high-paying companies, further skewing the groups who will benefit from these new accounts. That gap in employer participation means eligibility on paper does not guarantee access in practice for workers whose employers skip the program entirely.
Lastly, taxpayers must now wrestle with another wrinkle to their savings vehicles. Most taxpayers do not have unlimited funds to contribute to savings, and they are already dividing up these funds across a variety of different vehicles to maximize benefits. A taxpayer must now carefully consider the benefits of a pre-tax 401(k) contribution against a pre-tax Trump Account contribution. While the taxpayer can solve for the right answer, it furthers the need for a financial advisor, which may not be a possibility for many taxpayers.
While the notion that contributions to Trump Accounts can flow pre-tax from a paycheck may seem like it’s enhancing convenience, it might have some significant equity considerations. Because the tax savings increase with a family’s marginal rate, the households most likely to adopt payroll deferrals, and to see the biggest tax benefit from doing so, are the ones already earning enough to spare $5,000 a year. Simply put, the change favors high-income taxpayers even more than before. The rule still has to clear a public comment period, and an Oct. 13 hearing before Treasury and the IRS can finalize it, leaving room to build in guardrails. Until then, the $1,000 seed deposit remains the equalizer in this program, while the pre-tax paycheck option may end up being the part that is not.
Read the full article here