The 2025 One Big Beautiful Bill Act (OBBBA) introduced a new child savings vehicle known as “Trump Accounts.” With a federal $1,000 seed deposit for eligible newborns and various contribution options, these accounts are generating buzz among parents and financial advisors alike.
But what exactly are they and how do they function? This article breaks down the key features of Trump Accounts and explores when they might make sense in a client’s financial strategy.
1. What is a Trump Account?
The OBBBA authorizes “Trump Accounts” for children born between 2025 and 2028, with each “eligible” child receiving a $1,000 contribution from the U.S. Treasury, regardless of their family’s income.
But the contributions don’t stop there. In addition, parents, relatives, or others can contribute up to $5,000 annually in after-tax dollars until the year before the child turns 18. Employers may also contribute up to $2,500 per account, and this amount is not considered taxable income for the beneficiary. Charities could also contribute to these accounts if the contributions are made on an equal basis to all the children in a certain geographic area or birth year, for example. Contribution limits will adjust annually with inflation.
Account funds must be invested in low-cost mutual funds or ETFs primarily composed of U.S. equities. Tax-wise, these accounts resemble traditional IRAs: Earnings grow tax-deferred and withdrawals are taxed as ordinary income, with penalties for early withdrawals (before age 59½) unless used for qualified purposes like education or a first home (see more below).
Any child with a Social Security number who is under age 18 in the year the account is established can have one. The accounts are available in July 2026 and are slated to cost the Treasury $15 billion through 2034, according to the Joint Committee on Taxation.
Some large employers have already voiced support. Notably, Dell pledged to match the $1,000 federal seed deposit for children of its U.S. employees born during the eligibility window, signaling potentially broader momentum around public-private support for the program.
Pro tip: The accounts could make sense for parents who want to get a super early start on their child’s retirement nest egg since they do offer potentially decades of tax-deferred growth.
2. When can the money be taken out?
Starting January 1 of the year the child turns 18, the child can access the entire balance for any reason. This introduces a behavioral risk as the beneficiary may cash out rather than preserve the account for long-term goals like retirement or a first home.
Withdrawals used for qualified purposes, such as higher education expenses or up to $10,000 toward a first-time home purchase, are exempt from the 10% early withdrawal penalty—but are still subject to ordinary income taxes. Non-qualified uses, like buying a car, trigger both income tax and the 10% penalty. Any dividends or capital gains that stay in the account are not taxed as they accrue.
After age 59½, account holders can withdraw funds without penalty, but taxable portions are still subject to ordinary income taxes. However, to avoid the 10% penalty for non-qualified purposes, the account would need to remain untouched for decades.
Pro tip: For many families, a Section 529 college savings plan may be a more advantageous option than a Trump Account, thanks to its higher contribution limits, broader investment choices, and more favorable tax treatment. However, for high-income families who have already maxed out a 529 plan, a Trump Account might serve as a supplemental retirement savings tool. And of course, the $1,000 government-funded head start is a compelling bonus for everyone.
3. How are withdrawals taxed?
The tax rules become even more complex when personal after-tax contributions are added.
Here’s how the math works: Suppose a parent contributes $10,000 in after-tax dollars, and the account earns $4,000 in investment gains. The $1,000 federal seed deposit is treated as taxable income, just like the investment earnings. The total account value is now $15,000, and the taxable portion is $5,000 ($4,000 in earnings + $1,000 federal deposit). That means one-third of any withdrawal will be taxable, regardless of purpose or age.
So, if the beneficiary withdraws $6,000, then $2,000 of that withdrawal will be considered taxable income, even if for education. The remaining $4,000 is treated as a return of after-tax contributions and is not taxed. That means there are fewer tax-planning opportunities when compared to traditional and Roth IRAs where there is either a tax break on contributions or on withdrawals. Trump Accounts have neither.
Pro tip: Even qualified withdrawals, like those for college, can still trigger a tax bill if the account includes earnings or third-party contributions. Make sure clients understand that “qualified use” doesn’t mean “tax-free” in a Trump Account.
4. A less flexible tax picture
Trump Accounts are especially tricky because they lack the key tax advantages of other accounts.
There’s no potential upfront deduction like a traditional IRA and no tax-free withdrawals like a Roth or 529 plan. While earnings grow tax-deferred, all taxable portions, including the federal seed deposit, other contributions (from family members, employer, or charity), and gains, are taxed as ordinary income when withdrawn.
Unlike Roth IRAs, where contributions can be withdrawn tax-free, Trump Account withdrawals are taxed proportionally, limiting tax planning flexibility. Advisors should clarify these differences, as the rules may be less intuitive than they appear.
Additionally, the same tax treatment applies to employer and charitable contributions, as they are considered earnings and taxed accordingly. This means they don’t count as after-tax contributions and are not eligible for special tax-free treatment. Instead, they are included in the taxable portion of the account and taxed at the account holder’s ordinary income tax rate upon distribution.
Pro tip: Trump Accounts could certainly be worth it for the free money, but parents should look at other savings options before they add their own funds to the accounts. Trump Accounts can be confusing, with complex tax rules and withdrawal restrictions that differ from more familiar options like 529 plans and Roth IRAs. Advisors should proactively educate clients and prospects to avoid misunderstandings and help them make informed decisions about how, or if, these accounts fit into their broader financial plans.
Trump Accounts offer a unique blend of early contributions, broad eligibility, and long-term growth potential. However, their complex tax treatment and restrictions make them a tricky fit for many families.
Advisors should carefully walk clients through the implications before they commit additional funds beyond the $1,000 federal seed money.