One of the key provisions of President Donald Trump’s “Big Beautiful Bill” establishes so-called “Trump Accounts,” designed to encourage savings for newborn children. In addition to receiving an initial deposit from the federal government, the accounts allow for additional contributions by parents or employers.
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The question is this: Should you actually invest your own money in these accounts? Or is there a better option among the other types of regular and tax-advantaged accounts that are already available? Here’s a brief overview of the provisions of the Trump baby accounts and some recommendations as to whether or not you should invest.
The Trump Accounts are custodial, tax-deferred accounts that are somewhat like a hybrid of a traditional custodial account and an IRA account. They are registered in the name of the child, like a custodial account, and the money inside grows tax-deferred, like in an IRA.
Money in a Trump Account cannot be withdrawn until age 18. After that, withdrawals can be made, but they are fully taxable and may be subject to a 10% penalty if withdrawn before age 59 1/2, as with IRAs and other tax-deferred retirement accounts. As with IRAs, there are some exceptions to the 10% penalty rule, including withdrawals for higher education and the purchase of a first home.
One of the unique benefits of a Trump Account is that the government will fund the first $1,000 in each and every account. After that, parents or employers can contribute up to an additional $5,000 per year, with a limit of $2,500 coming from employers.
Unlike investments in other tax-deferred accounts, like 529 plans, IRAs and 401(k) plans, investments within a Trump Account are strictly limited to a U.S. stock market index fund.
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Here’s a side-by-side comparison of the basic provisions of a Trump Account with a 529 plan, which is a commonly used, tax-deferred college funding account.
|
Trump Account |
529 Plan |
|
|
Government Contribution |
$1,000 |
$0 |
|
Contribution Limit |
$5,000 annually |
Variable; typically in the $300,000 range over the lifetime of the account |
|
Investment Options |
A U.S. stock index fund |
Typically a range of mutual funds or ETFs |
|
Taxation of Withdrawals |
Fully taxable; 10% penalty before age 59 1/2, with some exceptions (first-time homebuyer, education, etc.) |
Tax-free if used for education; earnings are fully taxable otherwise, with a 10% early withdrawal penalty if not used for qualified purpose |
|
Account Ownership |
Child’s name; could affect student aid |
Account owner’s name (typically a parent); reduced FAFSA impact |
|
Tax Treatment of Contributions |
Funded with after-tax money |
Funded with after-tax money |
|
Withdrawal Time Frame |
Not allowed until after age 18; taxable upon withdrawal |
Anytime, but must be used for education to be tax-free |
|
Risk Level |
100% equity portfolio; restricted withdrawals until 18 |
More diversified investment options |
|
Asset Management |
One investment option |
State investment plans or professional advisor; some DIY options |
As Michael Reynolds, a certified financial planner at Elevation Financial in the Indianapolis area, told NPR, “I’m going to take the thousand dollars, definitely. Nothing wrong with that.” But beyond that, most advisors suggest that 529 plans might be the better option.
