The One Big Beautiful Bill Act added a new type of savings vehicle that encourages saving for a child’s future — Trump Accounts.
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It’s structurally similar to the traditional IRA, but there are different rules. Here’s what parents need to know about Trump Accounts.
What Is a Trump Account?
According to the Tax Foundation, a Trump Account is an individual retirement account designed to give eligible children a head start financially by allowing parents and others to contribute up to a combined $5,000 of after-tax dollars per year. Employers can also contribute up to $2,500, which is not taxed upfront. These amounts will be adjusted for inflation starting in 2027.
Also, the government will seed the account with a one-time $1,000 tax-free contribution as part of its pilot program. This initial contribution does not count against the $5,000 annual limit. To be eligible for the $1,000 pilot program, children must be born between Jan. 1, 2025, and Dec. 31, 2028, and be a U.S. citizen with a Social Security number.
Learn More: 5 Ways Trump’s ‘Big, Beautiful Bill’ Could Impact Your Wallet
How Does It Work?
Funds in the account grow tax-deferred and may be accessed once the child turns 18. At that point, money can be used for approved purposes, such as higher education expenses or a first-time home purchase.
Withdrawals made outside of qualified uses may be subject to taxes and penalties similar to those governing traditional retirement accounts. Withdrawals made before age 59 1/2 are subject to regular income tax and a 10% penalty, the Tax Foundation reported. Exceptions include college tuition, which is unlimited, and first-time home purchases, up to $10,000.
Is a Trump Account Worth It?
During this pilot program, the American Society of Pension Professionals & Actuaries (ASPPA) noted that there really is no financial downside to opening one and getting the $1,000. Also, it noted that this seed money pilot program could be extended later on.
Erin Koeppel, the managing director of government relations and public policy counsel at CFP Board, explained to ASPPA that whether a Trump Account makes sense could be dependent on the goals and circumstances of individual families.
If you’re considering a Trump Account for college expenses, a 529 plan may be a better option, per ASPPA. Koeppel explained that withdrawals from 529 accounts aren’t taxed, and families can contribute more to a 529 account each year than to a Trump Account. Plus, many states offer tax deductions on contributions, and 529 plans have more investment options.
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This article originally appeared on GOBankingRates.com: 3 Things Parents Need To Know About New $1K ‘Trump Accounts’ for Kids
