Trump Accounts: What You Need to Know

# Trump Tax-Advantaged Accounts

The so-called Trump Accounts function as custodial, 'IRA-like' savings plans intended to help children build long-term financial security. The accounts have been structured to allow investments to grow tax-deferred. They are designated solely for the child’s benefit. These funds are locked until adulthood (eighteen years of age) and treated as a traditional IRA.

# How Do Trump Accounts Work?

Children born between January 1, 2025, and December 31, 2028, will automatically receive a one-time federal contribution of $1,000 when the account is opened. These funds will be deposited via IRS or Treasury mechanisms unless families choose to opt out. Parents can contribute up to $5,000 per year per child. Employer's may also contribute up to $2,500 annually per employee. These contributions are excluded from the employee’s gross income.

Contributions to these accounts are invested into low-cost U.S. equity index funds like the S&P 500. The law surrounding these accounts do not allow for industry-specific funds. Like with IRA plans, earnings from these accounts grow tax-deferred until it is time to withdraw funds. If proceeds are used for a qualified purpose such as higher education, small business use, or a first-time home purchase, they will be taxed at the preferential long-term capital gains rate, rather than ordinary income tax rate. Non-qualified withdrawals may incur ordinary income taxes plus a 10% penalty. Make sure you understand the withdrawal options so as not to incur a penalty.

No withdrawals are allowed before the age of eighteen unless specified for disability. After age 18, up to 50% of the balance may be withdrawn for qualified uses (see above). At 18 years old, these accounts roll into a traditional IRA with standard IRA tax treatment upon distribution. At age 25, beneficiaries may access the full balance for qualified expenses. Lastly, by age 31, any remaining balance in the account is treated as distributed and taxed accordingly.

# Who Is Eligible for a Trump Account?

Any child of US citizenship under the age of 18 with a valid Social Security number may have a Trump Account. The $1,000 government seed contribution is only for children born between 2025 and 2028 and of course, for qualified U.S. citizens. The Federal government may automatically open accounts for eligible children using IRS data, unless parents specifically opt out. Odd, I know, but they can do it.

# Good New, Bad News

Early financial investment can cultivate long-term wealth-building. We all have good intent to put away for our children. Sometimes it happens and sometimes it does not. Even families of limited means can start with the seed money provided by the Feds. Down the road, qualified withdrawals can also benefit from a lower tax treatment. Finally, employers can contribute, serving as a supportive benefit for employees.

There are also a downside. The accounts are restricted to equity-only index funds. Meaning, if the market was to dip near college time, your child’s savings could suffer. Complex age thresholds and related penalties could diminish some of your hard-fought savings.

Families interested in long-term financial planning for their children should consider setting up a Trump Account especially if our child qualifies for the $1,000 seed money. It is not every day someone gives you $1,000. Compare this options with someone knowledgeabl against other investments like a 529 Plan. In all cases, it is recommended to work with a financial advisor or tax professional to assess the best investment strategy for you.

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