One of the provisions of last year’s extensive tax bill was the addition of a new investment option for children. While they were created under Section 530A of the Internal Revenue Code, these new accounts have come to be known more informally as “Trump accounts”. Now that these accounts have gone live as of July 4, this post will provide an overview of how these accounts work, as well as information on other options for saving or investing on behalf of a child.
At a high level, the Trump account works a lot like an IRA but without requiring the child to have earned income in order to receive contributions. Only one account can be opened for each child under the age of 18 with a Social Security number. Once active, each child/account can receive up to $5,000 in annual contributions. With an IRA, the child must have earned income from a job in order to contribute but any child—with or without a job—can receive contributions into a Trump account. This $5,000 annual limit is inclusive of both contributions from parents and other family members as well as any employer contributions that might be offered as a new employee benefit for parents (limited to $2,500 per employee). This limit will be indexed to inflation in the future. There is no immediate tax benefit to contributing, as the main benefit of this account is the tax-deferred growth of the investments in the account.
One of the rules of the account is that the balance must be invested in a low-cost index fund of American company stocks. Currently, there is only one investment option available for these funds—a low-cost S&P 500 index fund—but more index funds are expected to be added in the future. The change in value of the account is not taxed on an annual basis; the only tax event that occurs is when the child withdraws or converts the account after turning 18 (and more likely, after retiring). This is where the big benefit of a Trump account lies: parents aggressively funding these accounts for their children with the annual maximum in their younger years can create many decades of tax-advantaged growth that could balloon an account to six or seven figures when the child reaches retirement age.
Part of the tax bill from 2025 also included a pilot program for the federal government to contribute $1,000 per child born from 2025-2028 as a seed deposit into the account. In addition to the government contributions, philanthropists like Michael and Susan Dell have announced gift contributions to be spread across a large number of Trump accounts (filtered by median income in the child’s ZIP code). These deposits are not automatic; parents hoping to receive these funds must still go to the Trump account website or app in order to opt in to creating an account for their children.
Once the child turns 18, the account functions much like a traditional IRA, where most distributions are taxed as income in the year they are taken. Any early distributions before age 59.5 that are not for a small list of exceptions are also assessed a 10% early withdrawal penalty. The child also has the option to roll the account over to a traditional IRA or convert the funds to a Roth IRA for future tax-free growth.
Two other popular avenues of saving for a child are custodial brokerage accounts and 529 college savings plans. A custodial brokerage is an investment account that works very similarly to an adult’s investment account. However, these accounts have a predetermined custodian in charge of the funds until the child reaches the age of majority (usually 18 or 21, depending on the state). Unlike the Trump account, there are no contribution limits and these accounts can be invested in just about any publicly-traded investment, allowing for more diversification than a Trump account that requires only U.S. equity investing. The main downside of the brokerage account is the annual taxation; all dividends, interest, and capital gains are reported as taxable income in the year received/realized. However, minor dependent children have a window of tax-free investment income that might not cause as much tax impact as you might think. The first $1,350 of unearned income (from investments) is tax free while the next $1,350 is taxed at the child’s marginal rate. For an unemployed child, this marginal rate is likely 0% so, in many cases, the first $2,700 of investment income in the brokerage account would be tax free. After that point, additional income is taxed at the parent’s marginal rate, which is likely to be higher. The type of income is also important, as realized long-term capital gains (from investments held more than one year) in a brokerage account are almost always going to be taxed more favorably than withdrawals from a Trump account or IRA in the future, which count as earned income instead of passive investment income.
A 529 plan is an education-focused account that allows funds to be set aside for future qualified education expenses. As long as withdrawals are used for a broad range of qualified expenses, all growth in the account is withdrawn tax free. This would be much more beneficial than a Trump account that taxes the growth upon withdrawal if using the assets for schooling. In addition to tax-deferred growth while in the account, some states also offer an immediate tax benefit for the person contributing to the account. So while these accounts are a bit more restrictive on usage than custodial brokerage accounts, they combine some of the features of the Trump account (tax-deferred or even tax-free growth) with some potential immediate tax savings and flexibility on unused or leftover funds in the account such as rolling over to a Roth IRA for the beneficiary or reinvesting for the next generation’s higher education.
For children that do have earned income, contributing to a custodial IRA or custodial Roth IRA on their behalf may be a better choice than a Trump account. With the Roth IRA, all the future growth is tax free instead of taxed as income while the traditional IRA would offer some initial tax benefits/deductions. The contribution limit to these accounts is higher as well, up to $7,500 in 2026.
The ideal setup for investing on behalf of a child comes down to the primary goals for the investment. The Trump account is more focused on providing a head start for the child’s retirement savings whereas the custodial brokerage account maintains a lot more usage flexibility and the 529 plan can provide additional tax benefits but is limited to qualified education expenses to receive the full benefit. Once the child is older and working a job, it will likely make more sense to max out a Roth IRA before contributing to a Trump account.
The Trump account also has some administrative requirements that could become burdensome, as the portion of the account that was contributed with no tax benefit—such as those from parents and family members—represents the basis in the account and can be withdrawn tax free by the beneficiary in the future (although the same age limits for penalty-free withdrawals still exist). This differs from the account value that is represented by investment growth over time as well as any other contributions—such as the government pilot contribution or employer contributions—which are taxed as earned income upon withdrawal. For accounts that have been open and growing for multiple decades, the account will likely be a very large proportion of gains and limited amounts of basis that get returned tax free. However, to avoid being taxed twice on the basis, it is important to maintain thorough records of all contributions into the account, which can be cumbersome for an account that could remain open for more than half a century.
The introduction of the Trump account adds another option to the mix of custodial accounts and 529 plans for investing on behalf of children. Depending on parent goals for the funds, investing in a custodial brokerage or 529 plan account may offer more flexibility but each situation is unique. We would be happy to discuss if utilizing Trump accounts may be right for you and your family.
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