A Follow-Up to the Big Beautiful Bill: Investment Accounts for Children
As a follow-up to last week’s Up Early, a thoughtful client of mine inquired about the “Trump Account” created under the new tax bill. At its simplest terms it’s an IRA for children. At its more complicated terms it’s, well, fairly complicated. Here’s what I’ve been able to figure out so far:
The new tax bill creates what are called “Trump Accounts” for children who are US citizens with Social Security numbers. For children born from January 1, 2025, through December 31, 2028, the Federal government will contribute $1,000 to start. Parents of children born before 2025 can also open a “Trump Account” but that account is not eligible for the initial $1,000 government seed money.
Once open Trump Accounts can be funded by parents or others through a contribution of up to $5,000 annually until the child’s 18th birthday. Companies can contribute up to $2,500 annually for an employee’s eligible child and that contribution won’t apply toward the employee’s taxable income. These contribution limits will be indexed for inflation annually as well.
All families with children born during the eligibility dates can receive the $1,000 seed money regardless of income or net worth. The accounts are supposed to open mid-2026 with the $1,000 seed money available at that time.
No withdrawals are allowed until the child reaches the age of 18, and at that point for all intents and purposes the Trump Account is an IRA for the child. As such, IRA rules will apply, including additional contribution limits for IRAs that are currently $7,000 per year and, importantly, a 10% withdrawal penalty for distributions made before age 59 1/2, with some exceptions as noted below.
Investment options will be limited to low-cost index funds, but they have to track “primarily United States companies.” There is no clear understanding yet of where or who will be offering these eligible investment accounts so stay tuned.
The taxation of these Trump Accounts is where things are really complicated. Contributions made to the Trump Account do not count as taxable income to the child (even if they are made by the parent’s employer). The accounts will grow with all taxes deferred until withdrawal after age 18, and then any withdrawals made will be taxable.
How the funds are used will dictate how they are taxed. If the funds are withdrawn for school tuition, a first-time home purchase or small business expenses they are penalty free and will be taxed at capital gains tax rates. Funds withdrawn for other purposes (like a new car the 18-year-old may be eyeing) will be taxed at ordinary income tax rates which start at 10%, and they will also be subject to a 10% penalty if withdrawn before age 59 1/2.
Are Trump Accounts worth it? Yes, if the child is eligible for the $1,000 seed money. After that, I’m not so sure. The most power tool in investing is time, so starting an investment account for an infant allows for powerful compounding… at least until 18. Then, the 18-year-old is in charge (!). Will they continue the compounding, or buy a new car, taxes and penalty be damned. No way to know. Investments limited to only American companies doesn’t sit well with me either.
Like everything in this massive tax bill there’s a little bit more to clean up and learn about but I’m glad my client brought this issue up because I think it’s worth following carefully. I wouldn’t blink at opening the account if you can get the “free” $1,000. I would think twice before adding additional funds except those that your employer might be willing to contribute. Finally, I don’t think we’ve seen the last in terms of rule changes to the Trump Accounts. Stay tuned.
Fun fact: Amaze your friends and relatives by understanding the Rule of 72: That is an easy way to estimate how long it takes for any investment to double in value based on a given interest rate. Simply divide 72 by the interest rate. For example, with an 8.5% annual return it takes 8.47 years for the money to double. (72÷8.5). At a 6% annual interest rate it takes 12 years.
