Episode 113: Trump Accounts

Transcript

Hello and welcome to the Balanced Wealth podcast. My name is Jarrett Topel. Today, we are talking about a relatively new type of investment account, which are called Trump Accounts.

If you have a new child or grandchild, or you or a family member are planning to have a child, this is a program worth understanding. There may be free money available, which is not something we can say very often. However, this free money also comes with investment risks, tax consequences, and restrictions that families need to consider.

So, let’s begin with the basics. A Trump Account is technically a special type of traditional individual retirement account, or IRA, established in the child’s name. The accounts were established under the federal tax legislation enacted on July 4, 2025, commonly known as the One Big Beautiful Bill Act. A parent or adult manages the account while the child is a minor, but the child is the legal owner of the account.

Eligible children born from January 1, 2025, through December 31, 2028, may receive a one-time $1,000 contribution from the U.S. Treasury. To qualify for the $1,000 contribution, the child must be a U.S. citizen, must have a Social Security number, and must have been born during that four-year window.

It’s important to understand that the account and $1,000 deposit aren’t automatic. The parent or adult guardian must file IRS Form 4547 (the “Trump Account Election” form), either with a tax return, on its own, or electronically via trumpaccounts.gov

Now, beyond $1,000 government deposit that is being offered, families and friends may also contribute additional money to these accounts. Parents, grandparents, relatives, and other individuals may contribute to a child’s Trump Account, subject to a combined annual contribution limit of $5,000 per child.

Now let’s talk about how the money is invested. A Trump Account is not a bank savings account, and the money does not simply sit in cash earning a guaranteed interest rate. During the period before the child reaches age 18, the money generally must be invested in a low-cost mutual fund or exchange-traded fund that tracks an index composed primarily of American companies. A good example would be an S&P 500 index fund.

The goal here is to provide a simple, diversified, and inexpensive investment, and to start investing when a child is very young so the account has many years to benefit from potential compound growth. However, despite recent sentiment, it’s important to understand that the stock market does not always move upward in a straight line. These accounts can lose value, sometimes substantially, and there is no guaranteed rate of return.

That’s especially important because families generally cannot withdraw the money simply because the market has declined or because they suddenly need it for another purpose. For most children, withdrawals are prohibited before January 1 of the calendar year in which the child turns 18. Once that age restriction ends, the account generally becomes subject to the same rules that apply to Traditional IRAs.

Traditional IRAs have early penalty exceptions for certain expenses, including qualified higher-education expenses and a limited amount for a qualifying first-time home purchase. However, even when an exception avoids the additional 10% penalty, regular income taxes may very well still apply. So, while these accounts may eventually help with education, homeownership, or retirement, families should not assume that money can be removed for any purpose without taxes or penalties.

So, one question being asked a lot right now is: is a Trump Account better than a 529 college savings plan? The answer depends on the family’s specific financial goals. A 529 plan may still be the stronger option when the primary objective is paying for education. Money in a 529 plan grows tax-deferred, and withdrawals for qualified education expenses are generally 100% tax-free. And, some states also offer an income-tax deduction or credit for contributions.

A Trump Account offers a different set of advantages. Of course, the big advantage is the $1,000 seed money from the government that comes with opening a qualified Trump Account. Beyond that, the money in a Trump Account is not limited exclusively to education.

Something else of note: Trump Accounts, for all their positive attributes, have also generated some serious debate. Supporters see them as a way to introduce millions of children to investing, compound growth, and long-term ownership of American businesses. They argue that beginning with even a relatively small amount can help a child develop financial knowledge and build a financial foundation that lasts a lifetime.

Critics, on the other hand, point out that the long-term results will depend heavily on whether additional contributions are made. Higher-income families may be better able to contribute the full $5,000 each year, while lower-income families may only receive the initial government contribution.

Some economists also question whether a restricted investment account is the most effective way to help children living in poverty, compared with direct assistance or an expanded child tax credit. Those are legitimate policy questions. From an individual family’s perspective, however, the immediate planning question is more straightforward: what benefits are available to your child, and how does this account fit with your other financial priorities?

Here’s the practical takeaway. First, if you have a child or grandchild born between 2025 and 2028, determine whether the child qualifies for the one-time $1,000 government contribution. If the child qualifies, free money is generally worth claiming, regardless of the other considerations discussed. Second, before making significant family contributions, compare the Trump Account with a 529 plan, a custodial account, a Roth IRA, and your other financial priorities.

Next up, consider the tax treatment, investment restrictions, control of the money, financial-aid implications, and when the child may need access to the funds. Trump Accounts could become a valuable part of a family’s long-term savings strategy. But they should be considered as one part of a broader financial plan, not as an automatic replacement for every other savings option.

At the end of the day, a $1,000 head start is nice, and free money should never be left on the table, but building significant wealth over the long run generally requires a comprehensive, holistic, and ongoing financial plan and commitment.