By Dr. Jim Dahle, WCI FounderOne of the more interesting aspects of the One Big Beautiful Bill Act (OBBBA) was the implementation of a new kind of investing account dubbed Trump Accounts (TAs). Originally called “Invest America Accounts” and “American Opportunity Accounts” before their polarizing renaming, the intent of TAs was to provide a financial stake in the capital markets for all children starting at birth so they will learn about investing, benefit from compound growth, and share a common interest in the broad success of American industries.
The legislation about these TAs was rapidly changing all the way up until it was passed, so there is quite a bit of false information on the internet about these accounts that resulted from differing versions of the House and Senate bills. I finally gave up and just went to the legislation itself to find a definitive source for information. You can do the same here (scroll to section 70204).
What Is a Trump Account?
At its core, a TA is a “baby bonus account,” which has had bipartisan advocates for a long time. When a child is born in the United States between January 1, 2025, and December 31, 2028, that child gets $1,000 put into a TA opened by the parents (or the government if a tax return with the child on it gets filed and there is no account yet) with the child as a named beneficiary. The money must be invested in a broadly diversified, US stock index fund (yay!) with an expense ratio of less than 10 basis points (yay!).
It cannot be withdrawn prior to the beginning of the year the beneficiary turns 18. Additional money can be contributed to the account by taxpayers and their employers, up to $5,000 per year (indexed to inflation but rounded to the nearest $100). Note that this means that, in the first year of contributions, the limit is $6,000. Nonprofits and state governments can also contribute additional amounts beyond $5,000 per year, although you can't establish a nonprofit just to make contributions to a select group of beneficiaries smaller than $5,000. If the parent doesn't create the account for the child, the government will. The first contribution cannot be made until July 1, 2026, and cannot be made after January 1 of the year the beneficiary turns 18.
Contributions made by taxpayers are NOT eligible for a tax deduction. Contributions made by employers, however, are deductible to the employer and the employee up to $2,500 per year (note that employers establishing these plans cannot discriminate in favor of highly compensated employees). If more than $2,500 is put in by the employer, it is taxable income to the employee.
Withdrawn earnings (along with employer and government contributions) are fully taxable upon withdrawal at ordinary income tax rates. Withdrawal of the non-deductible contributions is not taxable. I believe all withdrawals are prorated between contributions and withdrawals. Like an HSA, the second a TA is inherited, it ceases to be a TA, and all of its earnings are fully taxable at ordinary income tax rates to the estate or heir. In short, it's a lousy account to inherit.
More information here:
Which Accounts Will Make Your Kids Rich?
529s, Inheritance, and Roth IRAs for Kids
Is a Trump Account Better Than a 529?
Now that we understand what a TA is, we can consider some possible uses for it. Since there are no limitations on its use or any age 59 1/2 rule on withdrawals, one could potentially use it to pay for the post-high school education of the beneficiary. The logical question becomes, “Is it better than a 529?” The answer is a definitive no, although it does have three advantages over a 529:
- The government puts $1,000 into it and mandates that it be invested in a low-cost index fund for 18 years. There should be something like $4,000 in there by the time the kid turns 18. Many 529s have higher expenses, and they offer lousy investments and the ability to engage in dumb investor behavior. The government does not put money in 529s for you or open them on your behalf.
- An employer might have received a tax break for contributions of up to $2,500 per year; there are no employer tax breaks for 529 contributions.
- There is no hassle involved with using the TA, such as maintaining receipts for legitimate educational expenses.
However, those advantages are NOT even close to enough to overcome the 529 advantages. Consider these:
- Tax-free withdrawals of earnings used for education.
- State tax credits and deductions available in many states.
- Can be used before age 18.
- $35,000 can be rolled over to a Roth IRA if not used for education.
- Controlled by the owner, not the beneficiary.
- The beneficiary can be changed.
- Continues to be a 529 if the beneficiary dies.
- Dramatically higher contribution limits (basically none).
Is a Trump Account Better Than a Roth IRA?
A TA does have some advantages over a Roth IRA.
- The government puts $1,000 into it and mandates that it be invested in a low-cost index fund for 18 years. There should be something like $4,000 in there by the time the kid turns 18. Many Roth IRAs have higher expenses, and they offer investments and the ability to engage in dumb investor behavior. The government does not put money in Roth IRAs for you or open them on your behalf.
- An employer might have received a tax break for contributions of up to $2,500 per year into a TA; there are no employer tax breaks for custodial Roth IRA contributions.
- Contributions can be made even if the child has no earned income.
- No age 59 1/2 rule.
However, when it comes to income earned by the child going into the account, the comparison isn't even close.
- Tax-free withdrawals of principal and earnings when used for any purpose.
- Continues to be a Roth IRA at death, and it can be stretched for an additional 10 years.
- Higher contribution limits.
Roth IRA tax treatment is just way better than the TA tax treatment.
More information here:
How to Open a Roth IRA for Your Kids (and Should You)?
Is a Trump Account Better Than an ABLE Account?
A TA does have some advantages over an ABLE account.
- The government puts $1,000 into it and mandates that it be invested in a low-cost index fund for 18 years. There should be something like $4,000 in there by the time the kid turns 18. Some ABLE accounts have higher expenses, and they offer lousy investments and the ability to engage in dumb investor behavior. The government does not put money in ABLE accounts for you or open them on your behalf.
- An employer might have received a tax break for contributions of up to $2,500 per year; there are no employer tax breaks for ABLE account contributions.
- The child does not have to be disabled to fund a TA.
That said, for disabled kids, an ABLE account is dramatically superior for several reasons.
- Tax-free withdrawals.
- They do not reduce Medicaid eligibility (at least up to $100,000).
- Higher contribution limits ($19,000 in 2025 for an ABLE account vs. $5,000 per year for a TA, both indexed to inflation)
Like a 529 or Roth IRA, the tax treatment of an ABLE account is just better than a TA for its specified use.
Is a Trump Account Better Than a UTMA?
Another investing account used for children with similar flexibility to a TA is a Uniform Transfer to Minors Account (UTMA). Is a TA better than these? It does have some advantages, but overall, a UTMA is superior. The advantages of a TA over a UTMA include:
- The government puts $1,000 into it and mandates that it be invested in a low-cost index fund for 18 years. There should be something like $4,000 in there by the time the kid turns 18. Many UTMAs have higher expenses, and they offer lousy investments and the ability to engage in dumb investor behavior. The government does not put money in UTMAs for you or open them on your behalf.
- An employer might have received a tax break for contributions of up to $2,500 per year; there are no employer tax breaks for UTMA contributions.
- Tax-protected growth. This helps the money in a TA grow more rapidly than in a taxable account like a UTMA (although, to be fair, TA assets HAVE to be invested tax-efficiently already, and most five-figure UTMAs experience little taxation anyway).
- No kiddie tax as it grows if the account becomes large. As UTMAs grow to six figures, they often result in taxes paid at parental rates.
In my view, those advantages are not enough to make it more attractive than a UTMA. A UTMA has the following advantages over a TA:
- Long-term capital gains and qualified dividend tax treatment. All earnings from a TA are eventually taxed at ordinary income tax rates, which never have to be paid on UTMA earnings. In fact, many UTMAs will be drained with the earnings having never been taxed due to the 0% qualified dividend and long-term capital gains brackets.
- Can be tax-loss harvested and tax-gain harvested to further lower the tax bill. Appreciated shares can even be donated to charity eventually.
- Benefits from a step up in basis at death if the child dies.
- Can be withheld longer from a spendthrift kid. TA money becomes accessible at 18, but in most states, UTMA money is not accessible until 21.
- Can be accessed (with custodial approval) prior to age 18.
- No contribution limits.
What Is a Trump Account Actually Good For?
If a TA is not as good as a 529 for education, not as good as a Roth IRA for retirement, not as good as an ABLE account for the disabled, and not as good as a UTMA for everything else, what IS it good for? I think it is good for two types of families: the very poor and the very rich.
For the very poor, the family gets $1,000 and gets an investing account they probably would have never opened themselves (plus, it is mandatory that it is invested well and left alone for nearly two decades). It does function as that bipartisan baby bond account that so many have desired for so long. And if the beneficiary accesses it in their early adulthood, it's probably mostly tax-free anyway since they'll probably be in a very low tax bracket.
For the very rich, the family also gets $1,000 as well as a tax- and asset-protected account. While the tax treatment is not awesome, there is no kiddie tax due. If Junior is already going to have a $250,000 529 and a $100,000 UTMA (which you may not want to add to because of kiddie tax issues), why not fund a TA, too? If you put in $5,000 a year for the first 18 years of the child's life and it grows at 7% real, that account will be worth $170,000 in today's dollars at age 18 and, if left alone, over $4 million in today's dollars at age 65. The fees on this account are dramatically lower than an annuity, which would be taxed similarly. You can pay for your kids' retirement for only $90,000.
More information here:
Age-Appropriate Money Conversations: Teaching Kids Financial Literacy
Teaching Your Kids About Investing with The Stock Game
Will We Be Using a Trump Account?
Probably not. We don't expect to have any children (or even grandchildren) born between 2025 and 2028. But if we did or if this benefit gets extended, we'd give serious consideration to funding these for grandkids as part or all of their inheritance. We'd use it as part of their 20s fund, just like we use 529s, UTMAs, and Roth IRAs now.
Should Employers Offer Trump Accounts?
If your employer is going to offer you a TA, you should definitely take the (up to) $2,500 (per child) in additional compensation. But if you're an employer, your decision about whether to offer this benefit really comes down to whether your employees will value it more than additional salary, a 401(k) match, or other benefits. Most won't, and the cost to you is the same. So, I don't see these becoming a very commonly offered benefit (especially given the discriminatory nature of the benefit where those with many kids get a lot more than those with none, not to mention the polarizing moniker). But I could be wrong.
The IRA Question
There has been a lot of discussion generated by this statement in the law:
`(1) In general.--The term `Trump account' means an individual
retirement account (as defined in section 408(a)) which is not
designated as a Roth IRA and which meets the following
requirements:
However, it is really not clear what is meant by that. Some have asserted that a TA actually becomes an IRA when you turn 18, but that seems unlikely as that would mean the Age 59 1/2 rule (a 10% penalty on withdrawals prior to Age 59 1/2) would apply, which seems nonsensical for a baby bonus account. The law specifically says the Trump Account can't get stretched like an IRA if the beneficiary dies. It also says nothing about rolling it into an IRA or converting it to a Roth IRA. I expect this will all be clarified by the IRS at some point in the next year. Until then, speculating about using TAs for various techniques that would require it acting like a traditional IRA (like funding it to the max then doing a Roth conversion as soon as Junior turns 18) seems pointless. Let's just wait and see what the IRS says on this subject. You can't fund a TA for a year anyway.
What do you think? How do you think TAs should be used? Will you be making additional contributions to them? Why or why not?
Jim, thanks for the comparison to the other types of minor accounts. It looks pretty clear that there aren’t any significant advantages to putting extra money into this. They are approximately 3.6 million kids born in the US per year. It’s early, but if my math is mathing, that should be 3.6 billion a year taxpayers fund for this program. Not a huge price tag compared to the overall budget to help a young adult get a head start. I would be interested in 20 years to see a study on what this money is actually spent on when they come of age. My youngest kids are 13 and my urologist made sure I won’t have any more, so my kids won’t be benefiting from this. Let’s see if this program stays around long enough for my grandkids.
Yes, it’ll be interesting to see how it develops over the years, especially as administrations come and go.
You did not mention the mandatory withdrawal around age 30 that has been going around online. Is that not a part of the account? Meaning it can stay in the account until retirement age?
I also saw that (as well as that it had to be spent on education, a small business, or a first home) but I don’t think either one of those provisions made it into the final version. If I’m mistaken, please cite chapter and verse.
From http://www.taxlawcenter.org, You can’t withdraw anything before 18th birthday, and cumulative distributions taken between 18 and 25 may not exceed half the value of the account on the 18th birthday. A 10% additional tax is imposed on distributions taken before the 30th birthday that are not spent on qualified expenses. On the 31st birthday, the account ceases to be a Trump account, and any remaining balance is treated as distributed.
That’s how one of the bills was, but I don’t think that’s how the final legislation was written. The only article I found at that link is to a June 12th article and only talking about the House version.
https://taxlawcenter.org/blog/trump-accounts-serve-no-clear-purpose-and-would-exclude-vulnerable-children
Given how nothing in temporary in government, expect that this will be expanded by 2028. Nobody will want to “take away” a benefit once it is established. So kids born 2029 or later will also have access to these accounts, likely with government bonus as well.
The most interesting thing to me will be seeing if they are able to keep it simple and clean, or will they let slimy financial advisors in the door at some point to get people to “invest in annuities” or some other such nonsense. I mean, why are they “limiting individual choice by only letting you invest in one thing? Does the government really know best how EVERYONE should invest?” /s
Sometimes “paternalism” is best, like in this case. But it’s not hard to argue against it is it?
No bennies taken away? Tell that to the 11 million plus about to lose health coverage, or the people who will see their Medicaid benefits slashed/eliminated, or those on SNAP, or WIC….ad infinitem…
This will make for natural long-term socio-economics studies. For babies, and siblings, born before/after the 1/1/2025 date:
-Will the initial $1000 impact long term wealth?
The pilot program is back dated to Jan 1 2024.
But yes it’s going to be very interesting to parse the data. The most interesting cases to me will be looking at children born in a state like Pennsylvania or Ohio in 2025 before/after the birthright citizenship order goes into effect (if ever). Someone analyze this as a case control study some day.
The most interesting possibility to me about these accounts is if they can be converted to a Roth IRA after the kid turns 18. The bill says that a Trump Account is “an individual retirement account (as defined in section 408(a))” and should be treated “in the same manner” as an IRA except as provided otherwise in the bill. That should mean that they can be converted to Roth IRAs.
If so, you could put $5k away for a kid each year and then once the kid is no longer subject to the kiddie tax (and likely in a low tax bracket in grad school or a first job), they could convert to a Roth for little-to-no cost, and have decades of growth without any further taxation. Even if they didn’t want to pay to convert the earnings, they could roll the earnings portion over to a 401(k) and convert the basis tax free.
I was wondering the same thing. I assume that Trump Accounts will also not complicate Backdoor Roth IRA conversions for either the parent or child (earning NIL money or other high paying job) someday. It looks like Trump Accounts will be treated like a Roth IRA (Section 408(a) rules) instead of traditional IRA, as it pertains to classification for the pro-rata rules.
“SEC. 530A. TRUMP ACCOUNTS.
“(a) General Rule.–Except as provided in this section or under regulations or guidance established by the Secretary, a Trump account shall be treated for purposes of this title in the same manner as an individual retirement account under section 408(a).”
26 USC Section 408(a) is actually the tax code section for traditional IRAs, so these are a form of traditional IRA. (Confusingly, Roth IRAs are governed by 26 USC 408A, which is different than 408(a)). The bill provides that a Trump Account is “an individual retirement account (as defined in section 408(a)) which is not designated as a Roth IRA.”
I saw that line, but I’m not sure what to make of it. It clearly is NOT exactly the same as a traditional IRA. There is no age 59 1/2 rule, there is no ability to touch it before age 18, there is no stretching of it after death. It is unclear what the asset protection will look like (although I think it’ll be the same as IRAs), it is unclear if Roth conversions will be allowed, it is unclear if it can be rolled over into a traditional IRA and when that might be possible.
Yup, it’s interesting, but we need to wait for clarification over the next year as to how Trump accounts and IRAs are related. No big deal since you can’t fund one for a year anyway. I added a section to this post discussing this interesting issue.
From the Kitces article breaking down OBBA –
“Trump accounts will not be subject to the IRA aggregation rules under IRC Section 408(d)(2), which means there may be advantages to keeping them separate from other IRAs – for example, to avoid taxable conversion under the IRA pro-rata rules when making backdoor Roth contributions.”
Looks like Trump accounts balances will not be included in line 6 of form 8606. In other words, Trump accounts will not “mess up” the ability to do Backdoor Roth IRA contributions.
That answers one (minor) of many questions about exactly how these are going to work.
We have two grandchildren currently and have started a 20s funds. (In a brokerage in our name, with the GC as beneficiary)
Two more are expected in the fall.
I’ve thought I’d consider eventually switching to a UTMA account. Maybe these new accounts would be an option for those that qualify?
Where have you chosen to invest your 20s funds, and would you use these if someone qualified?
UTMA
529
Roth IRA
HSA
As noted in the post, we’d consider it if we had kids that qualified.
We will be having a child this year who will qualify. But we also have older kids who are ineligible. the 1k government contribution is happening but investing more is obviously up to us.
Jim- how would you go about being to be fair to the other kids? So far we’ve been investing equally in 529s. And will contribute equally to UTMA accounts since the 529s are in great shape. Appreciate your thoughts!
I tell my kids all the time that “life isn’t fair.” They assume that means some of them will get less than others (which is true) but what it really means is that life isn’t fair in their favor for all of them.
Bottom line, I try to be “fair enough” without being exact. They all have different amounts in their UTMAs, 529s, Roth IRAs etc. They’ll all be fine.
We tell our kids the same thing…. Fair isn’t equal. That will account for the differences in tuition at colleges that they choose. Or that one used UTMA funds for a house while the other chose to spend it on a honeymoon. Or whatever. But the scenario where one kid has 4 million sitting in a retirement account at 65 while the others don’t just because they were born in the wrong years strikes me as decidedly unfair. It would be nice if we could somehow stipulate that it gets divided equally but I can’t image that would be enforceable. The most realistic option is to contribute an amount that should get roughly to the same amount via a different retirement vehicle.
But if one got $8 million and one got $9 million would you really say either of them were treated unfairly? I wouldn’t.
Agree. The reality is that none of our kids will have anything to complain about. They won the birth lottery… at least as it relates to the financial situation they were born into. Even a 4 mil bump for one may not be that big of a deal depending on the decisions that they all make regarding family complexion, work, spending and saving. But I also know that issues of inheritance and perceived financial unfairness can drive a wedge between siblings and ruin families.
I’m close with my siblings (and my kids are close with their cousins)… coming from a big family is one of the greatest blessings of my life.
Our kids are are almost assured to be financially set… but the greatest legacy we could leave them is a close and loving familial connection. We’re working hard to build that and don’t want to set up too many barriers.
So start emphasizing early that life isn’t fair. Hopefully that’ll reduce wedge issues later.
I know the child has to be born in the specified year range to get the $1000, but do they have to be born in that range to have an account at all, i.e. can you open the account for existing older kids with only parent (or possibly employer) contributions?
I think they do have to be born in that range, but I won’t be surprised to see it extended. To younger kids though, not older ones.
https://sillymoney.com/p/how-to-use-trump-accounts-to-make-your-kids-tax-free-millionaires
This author makes the statement all kids under 18 yrs can start one.
I’m not sure ANY kid can start one. But their parent or guardian can and the government is supposed to for newborns if the parents don’t. All starting next year of course.
If I’m a sole proprietor taxed as an s-corp I’d be able to deduct the $2500 from my business right? That seems to be a good deal- tax free going in and tax preferred coming out?
Wait for clarification from the IRS. Former things like this have excluded small businesses like S Corps for just this reason.
Excellent, detailed summary of how this works and for who it works best. Another demographic that could benefit would be couples whose retirement plan contributions are limited by high incomes. Adding $5k/yr to this account could set the baby up for a nice-sized account that can be tapped for a house, starting a business, or if left untouched, an early retirement.
You seem to be confusing two goals. Money going toward retirement once you have retirement plans maxed out should go into a taxable account. Money in a Trump Account is for the kids. So maybe after you have a 529 and UTMA funded to the amount you want, the rest can go into a Trump Account.
Agreed. I didn’t mention that my daughter’s 529 is a two comma account. I would think an HSA would beat a taxable account as the next bucket.
I certainly wouldn’t put any more in there. That might be the largest 529 I’ve ever heard of. What’s your plan for all the extra money in there?
Not sure whose the HSA is, but if she’s not dependent and on a family HDHP, she can have a family HSA contribution. But if you’re giving her as much as it seems you are, it’ll end up in an UTMA/taxable account soon anyway.
Yes, it ballooned to that balance while it was a Coverdell, then transferred to two 529s when she turned 30. It will be a legacy 529. Of course, haven’t contributed a penny in a very long time. She has her own HSA, but just started out contributing a year or two ago, so still a very small balance. Between a ROTH IRA I started for her early on, dual high earners, and zero debt, she’s set for life at 33.