When the so-called Big Beautiful Bill included the Trump Accounts for children, it might have seemed like a political gimmick. But it’s real, at least in theory. There are $1,000 seed amounts for individual accounts and tax advantages. But the details are important, and the realization that not everything may be working efficiently or correctly.
Account Requirements
Trump Accounts are a type of Individual Retirement Account (IRA), according to Christopher Gandy, president of the National Association of Insurance and Financial Advisors. They are available to children under 18 who are U.S. citizens with a Social Security number. A parent or guardian has to open the account for the child; the government does not automatically create them. If a parent or parents have multiple children who fit the requirements, each can have their own account.
If the child meets the requirements above, there is the possibility of a $1,000 starting sum for the account, but it has additional restrictions. As Gandy noted, the child has to be born between January 1, 2025, and December 31, 2028. This is a pilot program, and unless Congress extends the availability, children born in other years cannot receive the starter sum. If you have multiple eligible kids with accounts, each can receive a $1,000 government deposit.
“This is legally a traditional IRA under a new section of the tax code, section 530A. However, you don’t get to pick just anything,” says Elizabeth Hale, an Arizona-based CPA and CEO at eeCPA. “The law requires the funds go into a low-cost index fund tracking U.S. stocks, capped at a 0.10% fee. Treasury’s default option right now is the SPDR Portfolio S&P 500 ETF, and until families can actively choose between fund options, that’s where contributions land. So, think index fund, not brokerage free-for-all.”
Aiming For Long-Term Saving
“The goal is simple, long-term growth rather than giving families unlimited investment choices,” adds Adam Bergman, founder of IRA Financial. “Even though I am a strong believer in alternative assets and diversification in IRA investing, in this case, I think simple and low-cost investment options makes the most sense until the child reaches the age of 18, where they can then rollover the funds to a traditional IRA, tax-free.”
Evan Mills, an associate financial advisor at Scholar Advising, compares these accounts to time capsules. “The goal is to let time do its job, not to open it every six months and rethink everything,” he says. “The number to remember on contributions is $5,000 in annual aggregate per child. Aggregate is the key word. It’s one bucket per child, so it’s not $5,000 from mom plus $5,000 from grandpa plus more from an uncle.”
Bill Harris, CEO and founder of financial advice company Evergreen.ai and, among other things, first CEO of X.com, which eventually became PayPal, says that some companies offer matching funds for Trump Accounts. Check with your employer because it could mean an extra boost.
When Kids Reach 18
When children reach age 18, they can convert their accounts to a Roth IRA. “It’s really valuable when the child is in college, because over those four to five years, depending on graduate school, you can convert basically the entire thing while keeping that child at a lower tax bracket,” Mills adds. “At the end of those four years, the child could be walking across the graduation stage with a diploma in one hand and $200,000 in a Roth IRA that will never be taxed again.”
Hale says she tells clients to “take the free money, always,” because there is no downside to opening the account and claiming the seed money if available.
Any use of the money, when allowed, has to be qualified, which means, “higher education, credentialing expenses, first-home purchase, or business start-up costs, and the tax consequences of pulling money out for anything else,” according to Evan Morgan, a CPA and principal in tax advisory services at Kaufman Rossin.
Things To Consider
Adam Michel, director of tax policy studies at the Cato Institute, told Investopedia that there may be better locations for saving, presumably, one might presume, if the child isn’t eligible for the $1,000 federal seed money.
“The treatment of the gains…is less favorable than basically doing anything else with them,” Michel said. “If you put after-tax dollars into a taxable brokerage account, the gains [are taxed] at a lower [long-term] capital gains rate. Or if you put money into a 529 savings plan, you face no tax at withdrawal.”
That is something to discuss with a financial advisor.
The Associated Press reported that while millions of parents signed their children up, some who did the paperwork earlier this month are saying they’re still waiting for the $1,000. AP noted that the Treasury Department said most families receive the money in one or two days.
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