All About Trump Accounts

Since Trump Accounts went live earlier this week, I’ve already received several emails asking about their structure and whether it makes sense for parents (and grandparents) to begin funding them.

As with most new tax legislation, not everything is fully worked out, and questions remain around basis-tracking, rollovers, and reporting, among other things. That said, there’s enough to work with, and no need to wait for the dust to settle to take action.

Below, I’ve highlighted some basic information about the accounts and, more importantly, how I see them being used and who they may be a fit for.

Importantly, as of this writing, there is no requirement that you voted for Trump in order to take advantage of these accounts 🙂

WHAT IS A TRUMP ACCOUNT?

A Trump Account is a new tax-deferred investment account for children, created under the One Big Beautiful Bill Act (Section 530A of the tax code). Think of it as a starter IRA for kids.

The basics of the account are:

– Open to any U.S. child under 18 with a Social Security number.
– There are no income requirements (such as with a Roth IRA) and no withdrawals are allowed before age 18.
– Children born 2025 through 2028 are eligible for a one-time $1,000 federal contribution (you must open the account and elect in to receive it).
– Family members, friends, and others can contribute up to $5,000 per year until the child turns 18, indexed for inflation after 2027; Note that only one funded Trump Account is allowed per child.
– Employers can contribute up to $2,500/year, but that counts toward the $5,000 cap.
– Investments are limited to low-cost U.S. stock index funds with expense ratios capped.
– Contributions begin July 4, 2026 (Hey, that’s Independence Day!) Accounts can be opened through IRS Form 4547 or at trumpaccounts.gov.

At a high level, there may be opportunities for long-term investors with discretionary income to help their children or grandchildren. From a purely structural (versus tax) standpoint, the primary drawbacks are only the lack of international diversification and all-equity allocation. Not deal-breakers for relatively small balances and long time horizons, just notable.

HOW TRUMP ACCOUNTS ARE TAXED

Unsurprisingly, I’ve already seen a lot of misinformation and confusion online about the tax implications of funding the accounts. Who knew the internet had false facts?

Contributions:
A Trump Account is basically a traditional IRA and, in fact, converts to one when the beneficiary turns 18 (whether this is automatic or requires action isn’t clear and may depend on the custodian of record at the time). Similar to other traditional IRAs and 401(k)s, growth in the account is tax-deferred, but that’s where the similarities end: some contributions may create a basis (think: non-deductible traditional IRA contributions), while others may not.

You read that correctly; not all contributions are treated the same, which makes tracking basis in the accounts — and the source of contributions — extremely important.

Personal contributions (from parents, grandparents, friends, the child) create and add to the basis, and as such, that money, though not the growth, comes back tax-free. Again, this is how non-deductible IRAs and taxable accounts work mechanically: if you didn’t deduct the contribution on the front end, that amount is a return of your already-taxed capital contribution.

The $1,000 government seed money, employer contributions, state/charitable contributions, and all investment growth do NOT create or add to basis, so those dollars are fully taxable as ordinary income when they come out.

Distributions:
After age 18, the account follows standard traditional IRA rules:

– Withdrawals before age 59½ are subject to a 10% early withdrawal penalty and ordinary income tax.
– Exceptions to the penalty exist for qualified education expenses, a first-time home purchase (up to $10,000), and a few other situations.
– Note that distributions for education purposes avoid the penalty, but are still taxed as ordinary income, a meaningful difference from a 529 plan, where qualified withdrawals are entirely tax-free.

HOW TO LEVERAGE A TRUMP ACCOUNT

Since the announcement of Trump Accounts (and likely beforehand), great and less-great minds have been scouring the rules for loop…er…opportunities. Here’s where I see a benefit to using these accounts:

• Newborn: If your child is/was born in 2025 through 2028, opening an account to capture the $1,000 federal contribution is worth doing, regardless of whether you take advantage of the other opportunities below.
• Wealthy Parents or Grandparents: Ask your grandparents to stop sending baby Johnny stacks of hundred dollar bills and instead fund a Trump Account (or 529, but please — not an UTMA!)

Example: J has four kids. J’s parents would like to help their grandkids begin their long-term savings. They contribute $5K to each of their grandkids’ accounts for 10 years, then stop contributing — why they stop is irrelevant, and I don’t want to talk about it, so let’s assume the child turned 18.  42 years later, assuming an 8% rate of return, the child, now 60, would have nearly $2MM. If the grandparents began funding when the child was born, it would be worth approximately $5MM!  While inflation will certainly eat into the real value, let’s assume it’s more than enough to buy a couple of coffees!

• The Roth Conversion Opportunity: Beginning at 18, the child can convert some or all their now-traditional IRA to a Roth IRA. That conversion is a taxable event (ordinary income tax on the pre-tax portion), but if it happens during years when the child has low income, the tax cost can be very small.

Example: The account holds $50,000 at age 18, with $30,000 of basis from family contributions and $20,000 of pre-tax money (seed, growth, etc.). The child is working part-time and earning $10,000/year. If they convert the full balance, only the $20,000 pre-tax portion is taxable. Combined with their part-time income, total income of $30,000, after the standard deduction, and depending on their filing status (dependent? Single?), the tax on the conversion is very small, if anything. For larger balances, the same logic applies. Staggering conversions across two or three low-income years (think early career, roughly ages 21 to 25) can keep the total tax bill very manageable.

Once the money is in a Roth, it grows tax-free for the rest of their life (under current rules) with no required minimum distributions. That’s 40+ years of tax-free compounding from an account that never required earned income to build.

Note: Kiddie tax rules may apply through age 23 for full-time students who are still dependents. If a conversion happens while those rules apply, the income could be taxed at the parents’ marginal rate rather than the child’s, defeating most of the benefit.

COMPARING TRUMP ACCOUNTS TO ALTERNATIVES

If you’re thinking about funding a Trump Account, consider your alternatives:

• 529 Plans
  For education-specific savings, a 529 is still hard to beat. For Colorado residents, CollegeInvest offers a state tax deduction on contributions, broader investment options (including bonds and age-based portfolios), and entirely tax-free withdrawals for qualified education expenses. That last part is the key difference: distributions from a Trump Account used for education avoid the 10% penalty but are still taxed as ordinary income.
  • If you’re saving specifically for college, the 529 wins on tax treatment.  That said, the two accounts serve different purposes and can complement each other well. A 529 covers education; a Trump Account, especially with the Roth conversion pathway, covers everything after that. For families already funding a 529 who want to do more, a Trump Account adds a useful second layer.
• Custodial Roth IRAs
  A custodial Roth IRA is more flexible and arguably more powerful than a Trump Account.  Tax-free growth and tax-free qualified withdrawals, contributions can be pulled out anytime without penalty, and you have full control over investment selection. The catch? The child must have earned income, and contributions are limited to the lesser of earned income or the annual Roth limit (currently $7,000). And no, I don’t believe your 2-year-old earned $7,500 modeling.
  • For teenagers with legitimate W-2 income from a summer or part-time job, a custodial Roth is probably the single best account available. A Trump Account fills the gap for all the years before that when there’s no earned income to support Roth contributions.
• Custodial Accounts (UTMA/UGMA)
  These are the accounts I like least for most families, and yet they’re often the first thing people set up. UTMAs and UGMAs offer total investment flexibility (stocks, bonds, real estate, whatever you want), and there are no contribution limits beyond gift tax thresholds. Sounds great on paper. But this comes with the following drawbacks:
  1. No tax deferral; investment income is taxed annually, and the kiddie tax means anything above a relatively low threshold (currently around $2,500) gets taxed at the parents’ rate.
  2. The financial aid impact is significant. UTMA/UGMA assets are counted as the student’s assets, which are assessed at 20% for financial aid purposes versus 5.64% for parental assets (like a 529).  Note that it’s not currently clear how Trump Accounts will impact financial aid, but they will likely be considered assets of the child, and as such, it’s reasonable to assume they will have a similar impact as an UTMA.
  3. The assets belong irrevocably to the child. In Colorado, UTMA assets transfer at age 21. At that point, there is nothing stopping your child from using the money you carefully saved for their future to buy a van and follow Phish around the country. I’m not judging the lifestyle — I’m judging the planning.

If the goal is long-term wealth building for a child, a Trump Account gives you tax deferral, a path to Roth conversion, and the assets don’t irrevocably transfer with no strings attached. If the goal is education savings, a 529 is more tax-efficient. In either case, the UTMA is rarely the best answer.

Clearly, the Tax Courts and legislators still have some work to do, but in the meantime, you can learn more and open accounts at trumpaccounts.gov.