Tax Implications of $1,000 ‘Trump Accounts’ for Children

The new savings accounts promise investment growth for kids but families must navigate new rules and possible tax bills on withdrawals.

A child holds up an American flag as Republican presidential candidate former President Donald Trump speaks during a campaign rally at Saginaw Valley State University in Saginaw, Mich., on Oct. 3, 2024. Jim Watson/AFP via Getty Images

A new tax-advantaged savings program created under President Donald Trump’s One Big Beautiful Bill Act is set to give American newborns a financial head start, while potentially adding some complexity to family finances and tax planning.

Under the bill, babies born in the United States between Jan. 1, 2025, and Dec. 31, 2028, will receive $1,000 from the federal government deposited into newly created “Trump Accounts,” investment vehicles modeled loosely on individual retirement accounts (IRA).

At a White House event in mid-June, Trump described it as a “pro-family initiative that will help millions of Americans harness the strength of our economy to lift up the next generation, and they’ll really be getting a big jump on life.”

Overview of Trump Accounts

Trump Accounts are designed to help families save and invest money for a child’s future from the earliest years of life. Once created, these accounts can be funded with up to $5,000 in after-tax contributions each year from parents, grandparents, other relatives, or family friends. Starting in 2027, this annual limit will rise with inflation to keep pace with the cost of living.

Employers also have the option to contribute to these accounts, at a maximum of $2,500 per year per child. These employer contributions are not counted as taxable income for the parent, and companies can deduct the payments as a business expense, provided they follow certain federal rules.

All money in Trump Accounts must be invested in low-cost mutual funds or exchange-traded funds that track a broad U.S. stock market index, such as the S&P 500. The law caps fund expenses at 0.1 percent per year, aiming to keep costs low so more money can grow over time.

The accounts are intended to remain untouched until the child reaches adulthood. After turning 18, account holders may access some of the funds under specific conditions, offering flexibility for major life goals.

Tax Treatment and Withdrawal Rules

Money inside the Trump Accounts grows tax-deferred, meaning parents don’t pay yearly taxes on interest, dividends, or capital gains. Instead, taxes are due when money is withdrawn.

Withdrawals generally aren’t allowed until the child turns 18. Between the ages 18 and 25, the account holder can access up to half the account balance, but only for certain approved purposes. Qualified uses include college tuition and fees, job training programs, costs related to starting a small business, or buying a first home.

If funds are withdrawn before age 18, or for non-qualified expenses at any age before age 30, the amount will be taxed as ordinary income and may be hit with a 10 percent penalty. This extra penalty is meant to discourage people from tapping into the accounts early for everyday spending.

Qualified withdrawals are taxed at long-term capital gains rates, typically 15 to 20 percent.

When the account holder turns 31, any remaining balance in the Trump Account is treated as if it’s fully withdrawn. Those funds are taxed as ordinary income but there’s no additional penalty once the account automatically closes at that age.

Trump Accounts Versus IRAs and 529 Plans

Trump Accounts share some similarities with traditional IRAs but also have significant differences. Unlike IRAs, which require the account holder to have earned income from work, Trump Accounts can be opened for newborns and funded before the child can earn money themselves.

Another key difference is tax treatment. Contributions to traditional IRAs can sometimes be deducted from a taxpayer’s income, reducing taxes owed that year. Contributions to Trump Accounts, however, are made with after-tax dollars, meaning there’s no upfront tax break.

However, Trump Accounts offer a potential advantage when money is withdrawn for approved uses. While IRA withdrawals are taxed as ordinary income, qualified distributions from Trump Accounts are taxed at the generally lower long-term capital gains rates of 15 to 20 percent. This could save beneficiaries money compared to paying higher income tax rates on IRA withdrawals.

Compared to 529 college savings plans, Trump Accounts offer more flexibility in some respects. While 529 plans limit tax-free withdrawals strictly to educational expenses, Trump Accounts allow withdrawals for other goals, such as starting a business or buying a first home. However, 529 plans let families contribute larger amounts over time—often more than $300,000 depending on state rules—while Trump Accounts are limited to $5,000 in contributions each year.

Additionally, withdrawals from 529 plans are entirely tax-free when used for qualified education costs, while even qualified withdrawals from Trump Accounts are taxed at capital gains rates. Some argue this makes Trump Accounts less attractive than 529 plans for families whose primary goal is saving for college.

Supporters of Trump Accounts contend the program could help more families build wealth from a child’s earliest days and offer young adults a financial boost as they enter adulthood. Some economists, however, say it will add another layer to an already complex landscape of financial planning and tax policy.

“The addition of the Trump Accounts would further complicate savings for taxpayers who would have to keep track of yet another account,” Tax Foundation economists said in a report.

The “ideal solution,” according to the Tax Foundation, would be for the government to offer universal tax-neutral savings accounts for taxpayers.

Andrew Moran contributed to this report.