Trump Accounts: What Parents Actually Need to Know

You have all probably seen headlines about a new child retirement savings plan called Trump Accounts. Also, you may have seen there is a pilot program offering $1,000 to seed those accounts for newborns. I have seen things like “it will be worth millions by the time they retire” or the extra try-hard-expert advice to convert the account to a Roth IRA when the child turns 18, so those “millions of dollars” are tax-free when they reach retirement age. It all sounds amazing. It is. Maybe. Sort of. But we need to know what Trump Accounts are, and how they fit into the already crowded space of child savings accounts.

What Is a Trump Account, Exactly?

Straight out of the One Big Beautiful Bill Act passed in 2025, Trump accounts are basically retirement accounts for children. Typically, to save in a tax-advantaged retirement account, one needs to have earned income from a job, but unless you have gotten awful tax advice from TikTok, your child likely does not have earned income for an IRA, Roth IRA, or 401(k).

Just like any other traditional tax-advantaged accounts (non-Roth), the money grows tax-deferred and is taxed as income in retirement. Unlike many tax-advantaged accounts, there are no deductions for contributions, which may make them less attractive than other savings accounts—I go into excruciating detail on why this matters later.

What About Free Money?

You’ve likely heard something about newborns getting free money, and that’s true. If your child is born between January 1, 2025, and December 31, 2028, the federal government will contribute $1,000 to a Trump Account on their behalf. You have to opt in. It doesn’t happen automatically.

To claim it, file IRS Form 4547 with your taxes or use the online portal at trumpaccounts.gov to start the process. There’s no income requirement, and the $1,000 doesn’t count against your annual contribution limit.

It’s genuinely free money and takes about five minutes. Even if you never contribute another dollar, $1,000 invested at birth grows significantly over 60+ years.

A few other sources of “free” contributions worth knowing:

The Dell family pledged $250 to Trump Accounts for kids under age 10 who live in zip codes with a median household income under $150,000. There are some interesting caveats to how this is done; you can read more here.

State-level contribution: Texas, Connecticut, and Indiana have committed additional funds for eligible kids.

Employers can contribute up to $2,500 per year to a child’s account pre-tax. Several large companies have announced plans to participate.

Even if you never plan to contribute a dime to this account on behalf of your kid, it still makes a lot of financial sense to open one. Even if your child is too old for the $1,000 from the Treasury, there is a solid chance that they will get contributions from other sources.

How the Account Works

Contribution limit: $5,000/year from parents, grandparents, friends, etc. (after-tax dollars). Employer contributions are capped at an additional $2,500/year and are pre-tax. Total contributions from these sources cannot exceed $5,000. The cap will be indexed to inflation starting in 2028.

Exception to the cap: Federal, state, and local governments, along with 501(c)(3) charitable organizations, may make contributions that do not count toward the $5,000 limit.

Tax treatment: Growth inside the account is tax-deferred — no taxes on dividends or capital gains each year. You’re not filing or paying tax on the account’s annual growth; instead, taxes are assessed later, when the child withdraws the pre-tax portion. Because of how contributions and compounding work, almost all of it will be taxable as income when withdrawn, but more on this later.

Withdrawals: Not allowed until age 18. As I explain here for Babylist, the account is essentially a traditional IRA — taxed as ordinary income when money comes out, plus a 10% penalty for withdrawals before age 59½ unless an exception applies (college expenses, first home purchase up to $10,000, birth or adoption of a child, and a few others).

Investments: Unsurprisingly, Congress put on way more restrictions here than on their own trading. Only low-cost US index investments are allowed, so no individual stocks or foreign indexes, so you can’t diversify from US stocks.

The Real Math Behind Trump Accounts

The compounding story is genuinely impressive, as I am sure you have read or been told by your accountant: A $1,000 investment at birth growing at 8% per year is worth roughly $218,000 by age 70. The same investment made at age 18 is worth about $55,000. Starting early matters, obviously.

What is less obvious is that the new Trump jump-start for kids may not be the most efficient savings strategy for parents looking to jumpstart savings for their children. Dusting off my TI BAII Plus Professional, I can show you what 17 years of contributions and growth look like:

Cool. Here, we can see cumulative contributions of about $118k and $133k of growth for a grand total of $251,149. Not bad. I have seen a lot of suggestions from financial and accounting pros that you could immediately convert the account to a Roth IRA starting the year your child turns 18. That is technically true, but it triggers a tax headache:

• All the gains are taxable as income
• You may need to keep track of your statements to show your basis—people are awful about keeping this stuff (yes, even with everything online these days).

Comparing Trump Accounts to Custodial Accounts for Minors

A custodial account for minor(ish) children is a taxable investment account that allows an adult to manage a child’s investments. The assets become the child’s at their state’s age of majority. The accounts come in a couple of flavors, but that is beyond the scope of this post. The important thing is that this is a taxable investment account held for a child, whereas the Trump Account is tax-deferred.

The classic criticism of taxable accounts is that they create a tax drag on investment income and capital gains. Annual taxes add up over time, especially for those in high-income and high-capital-gains brackets. However, children have a tax advantage that most adults don’t: the kiddie tax.

Kiddie Tax

The kiddie tax is a set of rules that govern how a minor’s unearned income — dividends, capital gains, interest — gets taxed. For children 18 and under, and full-time students ages 19–24 who don’t provide more than half their own support, it works like this:

• The first $1,350 is not taxable
• The next $1,350 is taxed at the child’s marginal rate
• Anything above $2,700 is taxed at the parents’ marginal rate

That $2,700 threshold is actually a potential tax opportunity. With the right investment and tax planning, you can harvest gains inside a custodial account at the 0% rate each year and permanently reset the portfolio’s tax basis, which is something you can never do inside a Trump Account.

For example, let’s say a custodial account holds simple index ETFs. Over the calendar year, the ETFs pay $750 in dividends. The parent (or guardian) may sell up to $1,950 ($2,700 − $750) of capital gains at year’s end, and owe nothing in taxes. Reinvesting that cash immediately increases the account’s taxable basis, reducing the child’s future tax liability over the years. Using lower-dividend-yield ETFs allows for more efficient capital gains harvesting. This example shows why Bemiston Asset Management’s official stance is that dividends are lame and should not form the cornerstone of a good investment strategy.

Comparing the outcomes

Continuing from the example above, we have a new table comparing the accounts over 17 years. We can see that, on an after-tax basis, the taxable account actually performs better than the tax-deferred Trump Account over the same horizon.

The Kiddie Tax Works Against You Too

As you can see, over half of the Trump Account’s value is taxable. And the kiddie tax creates a real problem when converting a Trump Account to a Roth.

I’m actually surprised how many professionals are recommending a Roth conversion at 18, like it’s some sort of financial guru ‘hack‘. It’s not. It’s expensive.

While a child is still in school and claimed as a dependent, any Roth conversion gets taxed largely at the parents’ rate under the kiddie tax rules. Parents with a college-age kid are typically in their peak earning years, which is precisely when you don’t want to trigger a large taxable event.

Once the child is out of school and on their own, the kiddie tax goes away, but they’re not in the clear. A young worker, a few years into their career, is likely sitting in the 22–24% bracket. Converting a $250,000(ish) Trump Account doesn’t happen in a one off transaction either — it takes years of partial conversions to stay within a reasonable bracket, and during that time, the clock is running on taxes owed.

It’s also unlikely a 24-year-old has the cash sitting outside the account to pay the tax bill, which means either pulling from the account itself (triggering penalties) or forgoing other financial priorities: an emergency fund, a home down payment, or student loan payoff.

And here’s the part that doesn’t get said enough: almost all of that Trump Account balance is taxable income. Every dollar of growth, compounded over decades, comes out the other end as ordinary income. That’s the trade-off parents need to understand before treating this as a default savings vehicle for their kids.

So what happens if they just leave it alone until retirement?

Let’s say you contribute to the Trump Account for 17 years, and then your child never touches it until they reach the age for penalty-free withdrawals (today, it’s 59.5). After 42 years of compounding at 8%, the account will be worth over $6,363,985. Sounds amazing, and it is.

However, it’s all taxable income (like 99% taxable, still a tiny amount of basis if you can dig up those 42-year-old statements). In a world where this child (now a retiring adult) will have retirement savings independent of the Trump Account, they will likely be required to take minimum distributions, which would likely push them into a higher tax bracket. That’s not great. That simple fact alone is why financial advisors yell at clients to make Roth conversions at every opportunity so they don’t get thrown into a higher tax bracket in retirement.

What About 529s?

A 529 plan is still likely the best option for saving for a child. Policymakers have done quite a bit over the past few tax laws to remove the old “what if my kid doesn’t go to college” friction — and at this point, that question has a pretty good answer.

On the spending side, the One Big Beautiful Bill Act expanded the uses of 529 funds to include: career and technical education programs, certain gap-year programs, and student loan repayment up to $15,000 (lifetime). The K–12 cap doubled from $10,000 to $20,000 per year.

Interestingly, under SECURE 2.0, up to $35,000 in unused 529 funds can be rolled directly into the beneficiary’s Roth IRA, tax- and penalty-free. The account needs to be open for at least 15 years, and the beneficiary must have earned income. Money that doesn’t get spent on school can now jump-start your child’s retirement savings instead of sitting in a penalty trap.

When choosing between a 529 and a Trump Account, the 529 often wins on flexibility alone. Most states offer a tax deduction or credit for contributions, and the money can meaningfully impact a child’s life well before retirement age. A Trump Account locks money away until 59½ with limited exceptions. A 529 can pay for college, a trade program, or K–12 tuition, and eventually roll over into a Roth. If I had to pick one, I’d pick the 529.

TL;DR: Where Should You Save Money for Your Kids?

The first dollars should go to a 529. Yes, even if you don’t intend to send your kid to college. Most states offer a tax break on your income if you contribute, and the contributions grow tax-free. Qualified withdrawals are allowed for education beyond high school that falls outside of formal college (trade schools). Any unused funds may convert to a Roth account, up to $35,000. It simply offers too much for parents to ignore.

Next, assuming you have your 529 contributions and intentions figured out, you would want to take a long look at the custodial accounts. As mentioned above, you can harvest gains and drastically reduce the account’s overall taxable liability.

There are two caveats worth mentioning here: 

1) It’s your kid’s money: These accounts become the property of the child when they turn the age of majority in their state of residence. Some parents may not like that, but I think parents who can save for their children like this are also capable of instilling some of their values around money. Also, the funds being available sooner than retirement is a huge advantage. 

2) It will impact financial aid: These accounts also count as a child’s property when filing their FAFSA, potentially reducing any financial aid for which they may qualify. Parents who can contribute a significant amount to these accounts are unlikely to qualify for much financial assistance anyway.

That puts Trump Accounts last. Should you open one? Yes, absolutely. Your kid may qualify for money from the US Treasury or a generous billionaire. It’s also entirely plausible that your employer may make some sort of contributions in the future. Free money is always a no-brainer. 

When it comes to making regular contributions from your income, I am much more skeptical. Yes, the numbers can be eyewatering. However, those big numbers are all from early contributions and decades of compounding. The 529 and custodial accounts mentioned above are likely better for accumulating and spending.

Parents shouldn’t necessarily disregard the new Trump Accounts for kids, but they should note that these accounts aren’t the slam-dunk financial news headlines suggest they are. Trump accounts are simply a new tool in the crowded toolbox for parents looking to get their kids ahead, and they should use the right tools for the right job.