The new federal "Trump Accounts" address the need to give every American child a financial head start by promoting long-term savings and investment from a very young age. While it is rarely a replacement for other plans, it serves as a powerful supplement in specific scenarios.
The Trump Account
A Tool to Affect a $5k/yr. Non-Deductible IRA Contribution for the Benefit of Minor Child
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Eligibility
- Age: The child must be under the age of 18 at the end of the calendar year in which the election is made.
- Identification: The child must have a valid Social Security number (SSN).
- Account Limit: Only one Trump Account is allowed per child.
- Authorized Individual (Opener of Account): An authorized individual, such as a parent, legal guardian, adult sibling, or grandparent (in that order of priority), must make an election on the child's behalf using IRS Form 4547 or the online portal on the trumpaccounts.gov website (expected mid-2026).
- Contributor: Anyone. Total maximum contributions to account per annum cannot exceed the inflation adjusted amount of $5,000 per year, excluding the one-time Federal seed grant of $1,000
Benefits
- "Free Money" for Eligible Newborns: The most compelling reason to open a Trump Account is to receive the $1,000 federal seed contribution. Children born between January 1, 2025, and December 31, 2028, are eligible for a one-time grant of $1,000 regardless of whether the account is funded by further contributions. This does not count against the $5,000 annual limit.
- Saves for Child’s Retirement before They Begin Working: Unlike IRAs and Roth IRAs which require a child to have their own "earned income" (e.g., from a job), a Trump Account can be opened and funded at birth by anyone.
- Taxation: Funds grow tax-deferred; parental contributions are after-tax (tax-free on withdrawal); employer contributions are pre-tax (taxable on withdrawal).
- Withdrawals: Tax-free and penalty-free at 18 for specific uses (qualified education expenses, 1st-time home purchase- up to $10,000); otherwise, subject to IRA-like rules.
Restrictions
- Lockup Period: Funds cannot be withdrawn before the calendar year the child turns 18.
- Investments: Funds must be invested in low-cost, U.S. stock index funds (e.g., S&P 500).
- Gift Tax: Contributions do not qualify for the gift tax annual exclusion, meaning a gift tax return may be required, according to preliminary interpretations.
Taxation
- Birth to Age 18: Funds cannot be withdrawn before the calendar year the child turns 18.
- Age 18 to 59.5: Tax-free and penalty-free specific uses such as 100% of qualified education expenses, up to $10,000 towards a 1st-time home purchase. Non-qualified withdrawals are subject to 10% excise tax and ordinary income tax applied to the earnings portion of the withdrawal.
- Gift Tax: Contributions do not qualify for the gift tax annual exclusion, meaning a gift tax return may be required, according to preliminary interpretations.
Comparison to Alternatives
[1] https://www.irs.gov/pub/irs-drop/n-25-68.pdf