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Every child born between 2025 and 2028 is getting a baby shower gift from Congress and the president: a $1,000 deposit into a “Trump Account.”
It’s free money, but your baby can’t spend it. Think of “Trump Accounts” as seed money, basically, to encourage children and families to save and build wealth for the many expenses of adulthood.
“It’s an IRA for kids,” said Evan Morgan, a principal in the tax advisory group at Kaufman Rossin, an accounting and advisory firm.
Trump Accounts are part of the tax and spending package signed into law this summer by President Donald Trump. They join a crowded field of tax-advantaged savings plans that help Americans navigate the costs of education, health care and retirement, among other things.
What’s unusual, in this case, is that the accounts start at birth, and with a $1,000 balance.
“To me, if I drew a best-case scenario on that thousand dollars, it would be sitting in that IRA, compounding, until I retired,” said J. Spencer Williams, founder and CEO of the Retirement Clearinghouse, a financial technology firm.
How do ‘Trump Accounts’ work?
Here’s how the accounts work, according to analyses from Morningstar, the Tax Foundation and other sources:
The government pledges to create an account for any baby born between 2025 and 2028, and to fund it with a one-time deposit of $1,000. To qualify, the baby need only have a Social Security number.
Parents and others may contribute up to $5,000 a year into the accounts until the child turns 18. An employer may contribute up to $2,500 toward the $5,000 cap. State and local governments and private charities will be allowed to make broad contributions.
No one may contribute to the accounts until July 2026. Other details are still being ironed out.
To claim an account, parents probably will have to check a box on a tax form testifying that they are new parents, said Williams of the Retirement Clearinghouse.
The new law requires that Trump Account funds be invested in low-cost stock index funds, which mirror the performance of an index such as the S&P 500.
After age 18, Trump Accounts act like IRAs
Parent contributions are after-tax, but that money is not taxable when it is withdrawn. Any earnings on the contributions, however, are taxed when you withdraw them.
You can’t generally withdraw money from a Trump Account until the year a child turns 18. After that, it functions like a traditional Individual Retirement Account.
That means, 20 or 30 years from now, a young adult with a Trump Account will be able to withdraw money to cover education expenses or a first-time home purchase without penalties.
You can also hold onto the money until retirement. At age 59 ½, the early-withdrawal penalties go away.
The accounts originally were designed to be spent by children in young adulthood. The Senate restructured them into something more like a conventional IRA.
“This became nothing but a retirement account, at the end of the day. And there’s nothing wrong with that,” said Miklos Ringbauer, a CPA in Southern California.
The last-minute changes left many people confused about Trump Accounts. Ringbauer said he has fielded questions from clients.
“We have to correct all the misinformation that’s out there,” he said.
Are Trump Accounts a good investment?
Given the promise of free money from the government, Ringbauer said, it’s hard to imagine many parents will pass up a chance to acquire the accounts.
“Anything is better than nothing,” he said. “There are so many kids who start out with nothing.”
The harder question, perhaps, is whether parents should actively contribute to the accounts over the next 18 years.
“It’s free money. The question is whether you would add onto it,” said Monique Morrissey, a senior economist at the left-leaning Economic Policy Institute.
If your goal is to save for a child’s education, a 529 education savings account “offers more flexibility and tax benefits,” according to a Tax Foundation analysis.
“I think most parents are going to be better off saving in a 529 for their children rather than this new Trump Account, but it certainly makes sense to collect on the $1,000 contribution,” said Romina Boccia, director of budget and entitlement policy at the Cato Institute, a libertarian think tank.
Boccia calls Trump Accounts “a blatant giveaway, and a way for the Trump administration, in their hopes, to leave a permanent mark by naming a rather useless savings account after the current president.”
Morrissey predicts Trump Accounts will become “a niche thing,” favored by parents with large portfolios and paid investment advisers. “I don’t think these are going to take off in a big way,” she said.
The Tax Foundation notes that the U.S. tax code already provides for “at least 11 different tax-advantaged savings vehicles, each with different rules, limitations and regulations.”
Trump Accounts encourage long-term saving
On the other hand, a Trump Account encourages the kind of long-term retirement saving that financial planners generally recommend. The earlier you invest, the more your investments are likely to grow before you cash them out.
“I’d call it an 18-year head start to retirement,” said Neal Ringquist, executive vice president of the Retirement Clearinghouse.
True, Trump Accounts add another layer of complexity to the tax code. But there’s nothing to stop account holders from consolidating their Trump Accounts with other retirement accounts once they reach adulthood.
“If the money isn’t used, it becomes an ordinary, traditional IRA in its adult life,” Williams said.
The initiative will cost an estimated $15 billion through 2034, at a time when the U.S. government faces a $37 trillion national debt.
Even so, proponents hope the new accounts will inspire a generation of children to gain financial literacy as they build wealth for adulthood.
“This is a really big step forward,” Williams said, “in terms of using the American free market and the opportunity for growth and compounding to help people save for whatever comes next.”
