Trump Accounts (and alternatives)
Last month, President Trump signed H.R.1 into law. Otherwise known as the “Big Beautiful Bill (BBB),” this legislation contained both a wide array of new laws along with extensions for laws originally set to expire. Most notably, the BBB focused on tax brackets and policies. If you’re curious about the most relevant parts of the bill, check out my previous article: Thoughts on the BBB
One of the most interesting nuggets in the BBB is the establishment of “Trump Accounts” for children. This is a new type of tax-advantaged investment account designed specifically for kids; especially newborns. As we know, success in investing often takes a good amount of time and patience. This account could be very helpful, depending on your situation.
The details
Before we dive in to how this type of account compares to alternatives and if it is a good option for you, let’s break down the details.
Custodial account
Trump accounts are available for all children under age 18.
Parents can open a Trump account on behalf of their child.
Assets count as student assets on FAFSA application.
Contributions
The U.S. Government will provide a $1,000 tax-free seed contribution to Trump accounts for all children born between Jan. 1, 2025 and Dec 31, 2028.
Parents can contribute $5,000 annually to the account. Parent contributions are after-tax.
Parent contributions create cost basis in the account.
Investments
All funds must be invested in a low-cost index fund that tracks U.S. stocks.
Withdrawals
Qualified withdrawals are taxed at long-term capital gains rates. Note: as of the date of this article, it is still unclear if all qualified withdrawals will receive this treatment. For now, we will assume all qualified withdrawals will be taxed this way.
Qualified withdrawals can be for education, first time home purchase, starting a business, medical expenses, death, or disability.
Non-qualified withdrawals are taxed as income plus a potential 10% penalty.
Withdrawals in retirement are taxed at ordinary income tax rates.
Basis is not subject to tax.
Take the free money
Before we get into weighing the pros and cons of Trump accounts, there is one certain benefit all new parents should take: free money. As mentioned, if you have a child born between 2025-2028, the government will invest $1,000 into a Trump account for your child. This is free money. Regardless of your circumstances and savings goals for your child, parents should absolutely consider taking a $1,000 tax-free gift for the benefit of their child.
Need more arm twisting? Based on historical returns, $1,000 invested in a S&P 500 index fund has the potential to gr0w to over $7,000 by the time your child reaches college (1). Further, should your child decide to use the money as a down payment for a home, that same $1,000 could grow to over $15,000 by the time they turn 25. Of course, future returns are unknown and not guaranteed.
Again, free money. Any new parents should absolutely consider taking this free benefit.
Pros and cons (by goal)
Outside the $1,000 gift to newborns, participating in the Trump account has certain pros and cons. As any tax-deferred account, this type of account is tailored to incentivize certain behaviors. While IRAs, TSPs, and 401(k)s are specifically designed to incentivize saving for retirement, Trump accounts are designed to give young adults a financial head start in life. When it comes to whether or not you should choose to utilize Trump accounts, I will always return to my favorite refrain in personal finance: It depends.
When choosing any account, you should first start with your goal in mind. Retirement? IRAs and 401(k)s are usually pretty great. Early bridge to retirement? Brokerage accounts may suit you. Education? 529s are a great thing to consider.
Choosing an account to save for your child is no different. It depends on your goal. Therefore, well compare Trump accounts to common savings goals a parent might have in mind.
Goal: Education
One of the primary qualified withdrawals from a Trump account is money needed for education.
Up to now, the reigning popular type of education savings vehicle for children have been 529 accounts. Since 529s are run by the states, some of the details vary, but the main details of 529s are universal. Here is a comparison between Trump accounts and 529 accounts.
Contributions
Trump accounts are eligible for a tax-free $1,000 seed contribution from the government. No government contribution to 529s.
Anyone can contribute to a Trump account or 529. Parents, grandparents, strangers, etc.
Contributions to both Trump and 529 accounts are after-tax.
There is a $5,000 annual contribution limit per child for Trump accounts. There is NO annual limit to contributions to a 529.
Employers can contribute an additional $2,500 to a Trump account. This is not counted as income for tax purposes.
Some states limit lifetime contributions to 529s (ranges from $235,000-$600,00 by state) (2).
Contributors to a 529 account can use 5 years worth of annual gift exclusions at once (up to $95,000 in 2025).
Invested assets
Both Trump accounts and 529 accounts grow tax deferred.
Trumps accounts must be invested in low-cost U.S. based index funds.
529 accounts must be invested in pre-selected portfolios or funds. No individual asset ownership and trading is limited to a few times per year.
Withdrawals
Both Trump and 529 account withdrawals receive beneficial tax treatment if used for qualified education expenses
Both can be used for Higher Ed/postsecondary tuition and fees, books and supplies
529s can also be used for some k-12, room and board, and other related costs. Trump accounts cannot be used for those items.
If used for qualified educational expenses, withdrawals from Trump accounts are taxed at preferential long term capital gains rates (0% for single filers with taxable income less than $48,350, 15% for the majority of earners above that threshold (2025)).
Withdrawals from 529s are tax-free so long as they are used for qualified education expenses.
As you can see from this breakdown, both Trump accounts and 529 accounts are efficient ways to save for education. However, 529 accounts are clearly more focused on the goal. 529s have higher contribution limits, similar tax treatment, better tax treatment for students earning over $48,350, and can be used for a wider array of educational expenses.
Perhaps the greatest differentiator is how these accounts are treated when it comes to applying for financial aid. On the Free Application For Student Aid (FAFSA), assets owned by the parents and assets owned by the student are treated differently when calculating eligibility for financial aid. The government expects 5.64% of parent assets to be used for the child’s education. For students, the amount is 20%! This difference is important because, since Trump accounts are custodian accounts, ownership transfers to the child once they turn 18. Therefore, assets in a Trump account are counted as student assets on the FAFSA, potentially reducing financial aid eligibility. 529 accounts, on the other hand, are treated as parent assets and weighed at the lower, more preferred rate.
Goal: First time homebuying
Another benefit of Trump accounts is the ability to withdraw funds for a first time home purchase.
Real estate prices remain higher than historic norms, making entry to homeownership more difficult than ever. Trump accounts aim to help young adults overcome these challenges, providing much needed capital to make a down payment on a first home.
Before Trump accounts, the most commonly used account to help with this goal would be a Roth IRA and/or an Uniform Transfers/Gift to Minors Act (UTMA/UGMA) account. Just as above, let’s break down the details.
Contributions
Trump accounts are eligible for a tax-free $1,000 seed contribution from the government. No government contribution for Roth IRAs or UTMA/UGMA.
Anyone can contribute to a Trump account, Roth IRA, or UTMA/UGMA for the benefit of a child
For a youth Roth IRA, the child must have earned income equal to or greater than any amount contributed.
Contributions to Trump accounts, Roth IRA, and UTMA/UGMA are all after-tax.
There is a $5,000 annual contribution limit per child for Trump accounts. $7,000 for Roth IRA, and no limit for UTMA/UGMA.
Employers can contribute an additional $2,500 to a Trump account. This is not counted as income for tax purposes.
Invested assets
Both Trump accounts and Roth IRA accounts grow tax deferred. UTMA/UGMA accounts are taxable
If an UTMA/UGMA account has investment income greater than $2,700, any excess is taxed at the parents’ income tax rate.
Trumps accounts must be invested in low-cost U.S. based index funds. Roth IRAs can hold a much more broad array of investments, but not collectibles, tangible property, or life insurance. UTMA/UGMA accounts can hold almost any type of investment.
Withdrawals
Both Trump and Roth IRA account withdrawals receive beneficial tax treatment if used for first time homebuying.
Roth IRA withdrawals for first time homebuying are limited to $10,000. This is tax-free.
There is no dollar limit for Trump accounts. Withdrawals are taxed at long-term capital gains rates (0% for single filers with taxable income less than $48,350, 15% for the majority of earners above that threshold (2025)).
UTMA/UGMA withdrawals are taxed similar to brokerage accounts. Short-term/long-term capital gains rates apply.
There is no withdrawal limit for UTMA/UGMA accounts for any reason.
The use of these accounts for first time home buying is less clear. There are benefits for each, and certain restrictions and drawbacks as well.
Roth IRAs remain a remarkably efficient and useful investment tool. As we see here, the ability to withdraw $10,000 tax-free from a tax-deferred account for first time home buying is a wonderful benefit. That said, contributing to a Roth IRA for a child is more difficult than Trump or UTMA/UGMA accounts. The barrier of earned income can be a tricky barrier to overcome. Also, while $10,000 is certainly helpful, more funds will most definitely be needed to fund a down payment on a home.
After the homebuying benefit of Roth IRAs, the Trump account becomes a more lucrative option. Yes, there is infinite flexibility with UTMA/UGMA accounts, but the snares of kiddie tax can complicate things. Plus, UTMA/UGMA accounts give full access to children once they turn 18. Once ownership is transferred, the young adult can use the funds for any reason whatsoever. Trump accounts allows access to 50% of funds at 18 and qualified withdrawal rules apply. Parents concerned about their child’s maturity at 18 may find the restrictions of a Trump account more appealing.
Goal: Retirement
If the child chooses not to use Trump accounts for education, first time homebuying, or to start a business, they can use the account for retirement. Again, guidance on this is not currently clear, but the general consensus is that qualified withdrawals from a Trump account for retirement (after age 59 1/2) will be taxed as normal income.
The comparison here is much more brief than education and home buying. There are many options when it comes to saving for retirement. 401(k), 403(b), TSP, IRA, Roth IRA, Solo 401(k), and so on. All of these are all suitable and well-known vehicles for retirement savings. These accounts pair some sort of tax benefit to contributions or withdrawals. That is, either the contributions or withdrawals are tax-free. In addition, all assets in the account grow tax-deferred.
If our assumption about Trump accounts is true, it would be a miserably poor choice for retirement savings. Since contributions are made after-tax and all withdrawals (minus basis) are taxed at normal income rates, Trump accounts cannot compare to normal tax-deferred accounts. For those typical retirement accounts, the taxpayer receives a tax break when they either contribute or withdraw. Not the case for Trump accounts (as we understand it today).
If normal retirement accounts are somehow not desirable, brokerage accounts also have tax benefits over Trump accounts. Read more about the hidden tax benefits of brokerage accounts here.
I expect future guidance to change this treatment. If left in place, this tax treatment would make the Trump account the least tax-inefficient investment vehicle available.
Goal: Unknown/flexible
If goals are less clear, parents might not know where to turn when it comes to investing for their child. Education, home buying, and a head start on retirement are all worthwhile savings goals, but looking into the future and weighing the value of each is impossible. If flexibility is the goal, then Trump accounts offers a solution. For comparison, we’ll also look at UTMA/UGMA accounts, which have maximum flexibility.
Above, we’ve learned that there are currently other savings vehicles when it comes to saving for specific goals. However, while Trump accounts fall short of 529s for education and Roth IRAs for first time home buying, they contain a benefit that shines beyond normal tax-deferred accounts: flexibility. That is, while 529s can help with education, they have no ability to help for home buying. Also, Roth IRAs lose their tax-free benefit when used for education.
As we understand Trump accounts today, they are reasonably designed to do exactly what they intend to do: provide a financial head start for newborns and children. While we can dissect the individual nuances of the account, the flexible nature of Trump accounts is valuable. As a parent, you now have the option to place money in a tax-deferred account without worrying how the money will need to be used. So long as it is used for a beneficial financial goal (education, home buying, or business start-up), the withdrawals are taxed as a very preferred rate.
UTMA/UGMA accounts, despite the kiddie tax and transfer of assets at 18, are a very flexible option as well. Once the child obtains ownership, they are free to use the proceeds however they see worthy. Education, home buying, seed money for business, paying off student loans, funding a wedding, and so on. There are no specific intended uses for UTMA/UGMA so there are no specific tax breaks. However, as my article outlines, there are general tax benefits to these types of accounts. Primarily, any gain on assets sold will be taxed at long-term rates if held longer than a year. For most young adults just starting out, that long-term rate will be 0%.
A little here, a little there
There’s no crystal ball. It’s impossible to know how to set up your children for financial success. Lately, changes in these types of accounts have begun to address the concern that the accounts won’t be used for their intended purpose. For instance, beginning this year, 529s are eligible to be rolled into a Roth IRA (subject to certain terms and limitations). Also, Roth IRAs are as close to flexible as it gets when it comes to tax-deferred accounts. On top of many eligible reasons for early withdrawals from Roth IRAs (sometimes taxed), the owner can always pull contributions back completely tax and penalty free.
The Trump account takes a step in the right direction when it comes to general flexibility and setting your children up for success. Desirable but not yet perfect, they should be considered as a viable option for your children. And, one more time for you new parents: take the free money.
(1) Chan, Fei Mei, and Craig J. Lazzara. "Returns, Values, and Outcomes: A Counterfactual History." S&P Dow Jones Indices, September 2021. (2) Flynn, Kathryn. "529 Contribution Limits 2025: Maximums by State, Gift Tax Exclusion, and More." Saving for College, 30 May 2025, www.savingforcollege.com/article/maximum-529-plan-contribution-limits-by-state.Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial, investment, legal, or other professional advice. While we strive to ensure the accuracy and completeness of the content, we make no guarantees regarding its reliability or suitability for any particular purpose. Readers should consult with a qualified financial advisor before making any investment decisions. As a fiduciary Registered Investment Advisor (RIA), we are committed to acting in your best interests. However, past performance is not indicative of future results, and all investments carry risks, including the potential loss of principal.
