Have you ever looked at your retirement savings and wished you had started contributing sooner? What if you had begun an IRA a year sooner? Or better yet – as far back as when you were first born?
That may sound a bit extreme, but now it could be a reality for today’s youth.
Under the One Big Beautiful Bill, a new type of tax-deferred savings tool has been created called a Trump Account. Essentially, it’s an IRA (individual retirement account) intended for U.S. children under 18. The idea is to get kids involved with investing as early as possible so that they might have a brighter financial future.
Given that these are brand new, you (and everyone else) will naturally have questions. Here are 11 things to know about Trump Accounts.
1) What Is the Benefit to Opening a Trump Account?
Simply put, compounding. Compounding is when money grows on top of both your contributions and previous earnings over time.
Since markets tend to rise over the long-term, this creates a snowball effect where the balance may potentially grow over time. How much? By some estimates, your child could have tens or even hundreds of thousands of dollars by the time they’re a young adult.
Generally, compounding is how working adults accumulate enough money to retire in the future. However, if given the opportunity to start at an even earlier age, the benefits of this strategy may be even more substantial.
2) Are There Any Immediate Incentives?
Yes. The U.S. Treasury will make a one-time contribution of $1,000 to children born between January 1, 2025, and December 31, 2028.
If for nothing else, parents may wish to open an account and take advantage of this benefit. When considering compounding, the balance could multiply several times by the time these children become adults.
3) Who’s Eligible to Open a Trump Account?
Trump accounts are open to all U.S. citizens under age 18 with a valid Social Security number. Unlike with current IRAs, the child does not need to be working or receiving any sort of earned income. In fact, the child can be a newborn.
To sign up, parents or legal guardians must set it up for the minor. This can be done by filing IRS Form 4547, or by using the portal on the official government Trump Accounts website.
4) What Are the Contribution Limits?
Parents, family members, and other authorized individuals can contribute up to $5,000 per year to each Trump Account annually. The sum of all contributions must not exceed $5,000, or there will be a 6% penalty on the excess amount until it is removed.
Similar to a Roth IRA, these contributions are not tax deductible. From the perspective of the government, they are simply “gifts” to the intended beneficiary.
5) Can Employers Contribute?
Yes. Employers are allowed to contribute up to $2,500 per year tax-free on behalf of an employee’s dependent child. However, keep in mind that this money will count towards the $5,000 annual limit.
Like 401(k) employer matching, Trump Account employer contributions will not be considered as taxable income. Additionally, the employer can deduct the expense as part of the compensation of their employees.
6) How Are Trump Accounts Invested?
The investment options for Trump accounts will be very straightforward. They will be limited to low-cost mutual funds or ETFs (exchange-traded funds) that track either the Standard and Poor’s 500 (S&P 500) stock market index or other indices tracking the returns of equity investments in United States companies.
Additionally, for an investment to qualify, it must have an expense ratio less than 0.10% and be an index that corresponds to one tracked by publicly traded, regulated futures contracts. Because of the potential risks involved, the fund must also not use a sort of leverage.
7) Where Will the Accounts Be Held?
Trump Accounts will be housed and tracked through platforms selected by the U.S. government. Currently, this is Robinhood and BNY, although other major players are also expected to participate in the future.
8) Who Actually Owns the Account?
Any money in the Trump account will technically belong to the child. However, as minors, the parent or legal guardian will act as their custodian by managing the account and making investment choices.
When the beneficiary turns 18 years old, ownership and control transfer to them. The account can then be treated like a traditional IRA.
9) How Will Trump Accounts Be Taxed?
For the most part, there will not be any taxes associated with Trump accounts. Similar to a traditional IRA, contributions will grow tax-deferred for as long as they stay inside the account.
10) Can Money Be Withdrawn?
Generally, no. Withdrawals are not allowed from a Trump Account while the child is a minor.
After turning 18, the account owner can keep investing, roll it into another IRA, or take distributions. However, any distributions will be taxed as ordinary income and incur early withdrawal penalties (per normal IRA rules for withdrawing before age 59-1/2).
To avoid early withdrawal penalties, the funds would need to be used for one of the following exceptions:
- Higher education expenses
- The purchase or construction of a first home (subject to a $10,000 limit)
- The birth or adoption of a child (subject to a $5,000 limit; expenses must be incurred within a year of the event)
- Personal emergency expenses (subject to an annual $1,000 limit)
- Medical expenses that qualify for the medical expense deduction
- Health insurance premiums during a period of unemployment.
11) Will Trump Accounts Expire?
For now, no. Trump Accounts are intended to be permanent with no sunset date set. However, as with all retirement accounts, there is always the possibility of change if future proposals become law.
The Bottom Line
Trump Accounts will work like IRAs for children. By investing at a young age, the beneficiary can take advantage of compounding and may potentially accumulate thousands or even millions of tax-deferred dollars into adulthood.
While the money will essentially be locked up until they turn 18 years old, there are some immediate benefits such as a $1,000 incentive from the U.S. Treasury. As with all financial opportunities, review your budget and decide how this tool may be used to benefit your family in the future.
Featured image credit: Pexels
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