A new type of account, called a Trump Account, is now available as a savings vehicle for children under age 18. As a unique factor, children born in 2025-2028 are eligible for a $1,000 deposit by the government if they open a Trump Account. These new accounts are intended to allow savings for college and a child’s long-term retirement. We discuss the features of these accounts, how to open one, and alternative options.
How Does the Account Work?
These accounts are a new type of individual retirement account (IRA). Accounts can be opened for any child under the age of 18, with an added benefit of the government funding $1,000 into the account for children born in 2025 through 2028. Personal contributions (from parents or others) of up to $5,000 (indexed annually for inflation) are permissible each year prior to the child turning age 18. After the child turns age 18, traditional IRA contribution limits apply. These limits are subject to earnings limits and employment-related eligibility requirements. However, unlike traditional IRAs, contributions are not tax-deductible at any age.
How Can the Accounts Be Used?
Withdrawals generally cannot be made before January 1st of the calendar year in which the child turns 18 years old. The account is then expected to be treated as a traditional IRA and subject to the same rules. This means that penalties, along with taxes, will apply if withdrawals are made before age 59.5. However, IRA rules allow for penalty-free distributions for higher education or workforce training expenses, first-time home purchases (up to $10,000), and certain business investments.
How to Open an Account
If you elect to open an account for your child, you must file Form 4547. This form can be filed with your tax return or via the trumpaccounts.gov portal. The first contributions can be made after July 4, 2026. Any government contributions are expected to be deposited on or after this date.
How Can Contributions Be Invested?
The funds must be invested in certain mutual funds or exchange-traded funds that track the S&P 500 or another index of primarily American equities. These funds have not been specifically identified.
What Are Other Education Savings Options?
Because of the nuances of this type of account, and potential better options, careful consideration should be given as to whether to fund one. The most common alternative options for children under age 18 include:
- Custodial accounts which are accessible to fund expenses for the direct benefit of the minor prior to the child turning age 18. Examples include camp and education costs. Custodial accounts transfer to the child’s direct ownership upon attaining the age of majority. There is no contribution limit for custodial accounts.
- Section 529 plan accounts are intended to specifically fund future education costs. The contributions limits to these accounts are substantially higher. You can also gain a state tax deduction benefit depending upon the state you live in. Unused account balances can be transferred to another family member. Tax-free withdrawals are permitted for private K-12 school tuition and higher education (college or vocational training). Residual account balances can be used for future educational expenses or converted to Roth IRA contributions of up to $35,000. However, withdrawals for any other reasons are subject to income taxes and tax penalties.
Paying for your child’s education requires well-thought-out planning and strategy. We work with our clients to determine the best options to maximize savings and tax benefits. We invite you to contact us for more information.
