Trump Accounts Explained Is the $1,000 "Free Money" Worth the Tax Headache?
- The Treasury will provide a $1,000 deposit for U.S. children born between 2025 and 2028 to jump-start retirement savings, with enrollment beginning in 2026.
- Withdrawals are subject to intricate tax rules; federal seed money is taxed as income, and mixing after-tax family contributions triggers a pro-rata tax rule on all distributions.
- Accounts are restricted to low-cost, broad U.S. equity funds, making them less flexible than 529 plans or custodial Roth IRAs for most families.
The newly established "Trump Accounts," formally custodial individual retirement accounts for children, aim to provide a financial kick start for America's youth but come with a labyrinth of tax rules. Part of the "One Big Beautiful Bill Act," these accounts will be seeded with $1,000 from the Treasury Department for any U.S. citizen child born between January 1, 2025, and December 31, 2028. While the prospect of free money is appealing, financial advisers caution that for many families, existing savings vehicles like 529 plans or custodial Roth IRAs may offer superior flexibility and tax benefits.
The accounts are set to launch in 2026, with enrollment available via a new IRS form (Form 4547) or an online portal. Investment options are strictly limited to low cost mutual funds or ETFs comprised mostly of U.S. equities, with an expense ratio cap of 0.1%. Beyond the federal seed money, parents can contribute up to $5,000 annually in after tax dollars, and employers can add up to $2,500. Notably, Michael Dell has pledged to match the $1,000 seed money for children of his employees, and he and his wife have committed $6.25 billion to expand the program's reach.
However, the withdrawal rules create significant complexity. The beneficiary can access the funds starting January 1 of the year they turn 18, but tax consequences vary wildly based on the source of the funds and the purpose of the withdrawal. Federal seed money and employer contributions are taxed as ordinary income upon withdrawal. If the funds are used for non qualified expenses like a car before age 59 ½, a 10% penalty applies on top of taxes. Furthermore, because the account mixes after tax family contributions with pre tax federal funds, any withdrawal is subject to a "pro rata" rule, meaning a portion of every dollar taken out is taxable, unlike a Roth IRA where contributions can be withdrawn tax free.
Ultimately, while the Trump Account is a "good deal" for the free $1,000, experts suggest it is best utilized by wealthy families who have already maxed out other tax advantaged options. For most, the rigid investment choices and complicated tax treatment upon withdrawal make it less attractive than traditional college savings plans or custodial brokerage accounts for growing family wealth.