Starting July 5th, 2026, any American child born between 2025 and 2028 qualifies for a free $1,000 from the US government to kick start their financial future. This is the base of the new Trump accounts. What you may not know is that ANY child under the age of 18 can also open a Trump account with funds contributed by parents, grandparents and others. The free money for those new children makes this a no-brainer for parents, but the question is whether they should they be used for older children. And should parents continue to fund the Trump accounts annually? Are there better alternatives?
At a high level, Trump Accounts were established by the One Big Beautiful Bill[1] as a way for children to begin building wealth. The best way to think about a Trump Account is as an Individual Retirement Accounts (IRA) that parents can open for their children to secure their financial future. They’re “baby bonds,” accounts that are funded early in a child’s life with the goal of compounding over decades, not years, to support financial security and help build generational wealth.
But is this what families want and need? Most savings for children are focused on education, and these accounts can be used for that purpose, but that is not the main goal. Although the accounts are intended to be easy to open (you can fill out IRS Form 4547 to create one), there are still significant unknowns. Currently, Trump Accounts appear to be limited in scope, with only one custodian and one brokerage involved.
Like all tax-advantaged accounts, there are limits and provisions that must be followed. First, there is an annual limit of $5,000 that can be contributed[2].That can come from anyone. There’s also a provision that allows employers to contribute up to $2,500 of the $5,000 annual limit in a child’s Trump Account annually (so check those employer benefits). Contributions may also be given philanthropically, much like Michael and Susan Dell who are giving $250 for the first 25 million children under the age of 10 that do not qualify for the $1,000 from the federal government.
Investment options for Trump Accounts are limited. Funds must be invested in low-cost mutual funds or exchange-traded funds (ETFs) that are invested in primarily U.S. stock indices such as the S&P 500[3]. While this may keep things simple in investment selection, it might not give you the most diverse options that you may be looking for.
From a tax perspective, the treatment is mixed. Contributions will generally be made with after-tax dollars, while contributions from your employer, a charity, or the government are made with pre-tax dollars. Withdrawals depend on what part of the account is being withdrawn. Withdrawing the after-tax amounts will be tax free, while any pre-tax amounts will be taxed at the child’s income tax rate. Much like the growth of a Traditional IRA, the growth is tax-deferred, being taxed as income when withdrawn.
Looking ahead, these accounts are clearly designed with retirement in mind. Once the child turns 18, they can fully access their Trump Account. At that time, it will be considered like a Traditional IRA. Meaning that there’s a withdrawal penalty of 10% if taken out before the age of 59 ½ and would be taxed as ordinary income rates. While your child’s retirement allows for many years of compounding, it limits the flexibility and practicality for more immediate financial goals.
As with a Traditional IRA, there are exceptions to the 10% withdrawal penalty such as with purchasing a first home ($10,000 limit), educational expenses (tuition and fees, not room and board), or the birth of a child ($5,000 limit per child), but the withdrawal amount will still be taxed as income.
As a result, the real-world use case for Trump Accounts is likely smaller than it initially seems. For many families, priorities such as emergency savings, retirement planning for parents, and education funding will be the priority. In that context, placing funds to a long-term, relatively inflexible account would likely not be the most efficient choice. While educational expenses can be used from the Trump Accounts once they change to a Traditional IRA at 18 years old, the 529 plan is more tax friendly with tax-free earnings for qualified educational expenses and the ability to be used for room and board.
For those new babies in the family, you certainly want to take advantage of the initial $1,000 government contribution, but they are probably not the best option for older children or for continuing contributions. In fact, if the overall goal is to cover educational expenses, we prefer the state-sponsored 529 plans.
Ultimately, Trump Accounts are an interesting addition to the financial field, but as they currently stand, are unlikely to be the first solution for most families. They work best as a supplemental tool, especially when taking advantage of initial funding opportunities, rather than a replacement for more established and flexible strategies.
Savings Plan for Children
Attribute | Trump Accounts | 529 Plan | UGMA/UTMA |
Tax Treatment | Tax-Deferred Growth | Tax-Free Growth; Tax-Free Withdrawals for Qualified Education Costs | Taxable |
Non-Qualified Withdrawal | Taxed at Ordinary Income Rate and 10% Early Withdrawal Penalty | Taxed at Ordinary Income Rate and 10% Early Withdrawal Penalty | Capital gains tax |
Investment Options | Low-cost US Equity Index Funds/ETFs | Plan selected mutual funds and index funds | Any investment |
Qualified Uses | Retirement; Exceptions for higher education, first home | Higher Education, K-12 Tuition | No restrictions |
Account Owner | Owned by Child | Owned by Account Owner | Child takes full control at age 18-21 |
Best Used For | Long-term retirement wealth building with possible Roth conversion | Tax-Free growth for college and education costs | Maximum Flexibility |
