A new legislative package, dubbed "The One Big Beautiful Bill," has introduced "Trump Accounts," a novel tax-deferred savings vehicle for American children. Signed into law on July 4th, this initiative aims to provide a financial head start for newborns, with comparisons being drawn to existing savings plans like 529s and Roth IRAs.
Key Takeaways
- Eligible children born between January 1, 2025, and December 31, 2028, will receive a $1,000 government seed payment.
- Annual contributions of up to $5,000 are permitted, with potential employer contributions of $2,500.
- Funds must be invested in low-cost index funds tracking major market indices.
- Withdrawals are taxed at the long-term capital gains rate, unlike Roth IRAs where they are tax-free.
- Trump Accounts are not specifically designed for college savings, unlike 529 plans.
Understanding Trump Accounts
The "Trump Accounts" are designed to function similarly to traditional IRAs but with key distinctions. A significant benefit is the $1,000 initial deposit from the U.S. Treasury for eligible children, requiring only U.S. citizenship and valid Social Security numbers for both the child and at least one parent. This initial deposit, if invested and left untouched, could grow substantially over time.
Parents can contribute up to $5,000 annually per child until they turn 18. These contributions are not tax-deductible, but the earnings grow tax-deferred and are taxed at the generally lower long-term capital gains rate upon withdrawal. A unique feature allows employers to contribute up to $2,500 of the annual limit without it being counted as income for the parent or child, potentially making these accounts an employer benefit.
Trump Accounts vs. 529 Plans
While both Trump Accounts and 529 plans are designed for long-term savings, their primary purposes and features differ. 529 plans are specifically tailored for college savings, offering tax-free withdrawals for qualified educational expenses. Trump Accounts, however, have broader withdrawal allowances but are subject to long-term capital gains tax. Contribution limits also vary significantly, with 529 plans allowing much higher lifetime contributions compared to the $5,000 annual limit for Trump Accounts. Furthermore, 529 plans offer investment choice, whereas Trump Accounts mandate investment in index funds.
Trump Accounts vs. Custodial Roth IRAs
Custodial Roth IRAs require a child to have earned income to contribute, a requirement absent in Trump Accounts. Roth IRAs also offer tax-free withdrawals in retirement, a significant advantage over the capital gains tax applied to Trump Account distributions. While Roth IRAs have higher contribution limits ($7,000 in 2025), the lack of an earned income requirement for Trump Accounts makes them accessible even for newborns.
Should You Open a Trump Account?
For children born between January 1, 2025, and December 31, 2028, opening a Trump Account to claim the $1,000 government contribution is generally advisable due to the lack of any downside. For those with children born before this period, the decision is more nuanced. It is recommended to prioritize one’s own retirement planning and college savings before considering additional accounts. However, if other financial goals are met, a Trump Account can serve as a supplementary savings tool for a child’s future.
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