Imagine giving your child or grandchild a retirement account before they can walk, before they’ve earned a single dollar of income or before they graduate high school. That’s the idea behind Trump Accounts, a new federal investment account that gives eligible children a $1,000 government-funded head start.
What is a Trump account?
Trump accounts are federal child investment accounts intended to help build long-term wealth through the stock market. From age 0-17, a parent, grandparent or other guardian can open and fund this type of account on behalf of a child. Eligible children (children born between January 1, 2025, and December 31, 2028) receive a one-time $1,000 Treasury contribution after the account is established.
How do contributions and taxes work?
After this, you can annually contribute a total of $5,000 per year. Contributions can be made with after-tax dollars by parents, grandparents and employers. Investment earnings then grow tax-deferred, meaning no taxes are owed while the assets remain in the account. Because contributions were made with after-tax dollars, those contributions generally are not taxed again when withdrawn. Investment earnings are taxed as ordinary income upon distribution.
What happens at age 18?
Once the child turns 18, they gain full control over the account. The account then converts to a traditional IRA. This means money taken out early, before age 59 ½, falls subject to 10% early withdrawal penalties. Certain exceptions, including qualified higher education expenses or the purchase of a first home, may avoid this 10% penalty.
What can you invest in?
Inside Trump accounts, investment options are limited to low cost, unleveraged U.S equity ETFs. The default investment option is SPYM, with four additional ETFs as other options. When the account converts to an IRA, the investment restrictions lapse.
Final thoughts
Trump accounts are designed to encourage long-term investing from an early age and can be a good option for parents and grandparents looking to gift money to future generations. While they aren’t a replacement for a 529 plan or other savings vehicles, the $1,000 government contribution and decades of potential compound growth could make them something to consider. As with any investment account, it’s important to understand the contribution limits, tax treatment, and long-term nature of the account before opening one.
