A new legislative package, dubbed "The One Big Beautiful Bill," has introduced a novel savings initiative for American children: "Trump Accounts." This program aims to provide a financial head start for newborns, offering a government-seeded investment account with potential for long-term growth. The initiative has sparked discussions comparing its benefits and drawbacks to existing savings vehicles like 529 plans and Roth IRAs.
Key Takeaways
- Eligible children born between January 1, 2025, and December 31, 2028, will receive a $1,000 government contribution.
- Annual contributions of up to $5,000 are permitted from parents or employers.
- Funds are invested in index funds tracking the U.S. stock market.
- Withdrawals are taxed at long-term capital gains rates.
Understanding Trump Accounts
The "Trump Accounts" are a provision within "The One Big Beautiful Bill Act." For children born between January 1, 2025, and December 31, 2028, the U.S. Treasury will deposit $1,000 into a dedicated investment account. To qualify, the child must be a U.S. citizen with a Social Security number, and at least one parent must also possess a valid Social Security number. There are no income limitations for this initial government contribution.
Parents and employers can contribute up to $5,000 annually per child. These contributions are made with after-tax dollars. The funds must be invested in low-cost index funds that mirror major market indices, such as the S&P 500. The money is generally inaccessible until the child reaches the age of 18.
Trump Accounts vs. Other Savings Options
Trump Accounts vs. Traditional IRAs: Unlike traditional IRAs, Trump Accounts do not require the child to have earned income to contribute. While contributions to Trump Accounts are not tax-deductible, earnings grow tax-free. Distributions from Trump Accounts are taxed at the generally lower long-term capital gains rate, whereas IRA distributions are taxed as ordinary income. A key difference is the lack of required minimum distributions (RMDs) for Trump Accounts once retirement age is reached.
Trump Accounts vs. 529 Plans: While both offer tax-advantaged growth, 529 plans are specifically designed for educational expenses, with tax-free withdrawals for qualified costs. Trump Accounts have broader withdrawal purposes but are subject to long-term capital gains tax. 529 plans also offer significantly higher contribution limits and often state tax benefits, which Trump Accounts do not provide. Furthermore, 529 plans allow for investment choice, whereas Trump Accounts are limited to index funds.
Trump Accounts vs. Custodial Roth IRAs: Custodial Roth IRAs require the child to have earned income for contributions. While Roth IRA withdrawals in retirement are entirely tax-free, Trump Account withdrawals are taxed at the long-term capital gains rate. Roth IRAs also have higher contribution limits than Trump Accounts.
Should You Open a Trump Account?
For children born within the eligible timeframe (2025-2028), opening a Trump Account to claim the $1,000 government seed money is generally advisable, as it represents "free money" with no downside. Even without further contributions, the potential for compound growth is substantial. However, financial experts suggest prioritizing one’s own retirement savings and college planning before focusing on Trump Accounts for children born before 2025. If other financial goals are met, a Trump Account can be a beneficial addition to a child’s financial future.
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