The “One Big Beautiful Bill Act” in 2025 created a new savings vehicle called the Trump Account, designed to give children a head start on retirement savings. With the federal government offering a $1,000 pilot contribution for eligible children born between 2025 and 2028, it’s an opportunity worth understanding.

While Trump Accounts may encourage early saving and financial awareness, they may not be the most effective tool for families seeking to maximize long-term, after-tax wealth.

How Trump Accounts Work

Trump Accounts operate similarly to custodial traditional IRAs. The child is the account owner, while a parent or guardian manages the account until the child turns 18.

Annual contributions may be made by individuals, employers, or charitable organizations. Total contributions from all non-government sources are capped at $5,000 per year, and this cap will increase with inflation after 2027. Employer contributions are limited to $2,500 per employee per year and count against the annual limit.

Contributions made by parents or grandparents are after-tax, while employer and government contributions are pre-tax. Upon withdrawal after age 59½, individual contributions can be withdrawn tax-free, but all investment earnings and pre-tax contributions are taxable as ordinary income. Withdrawals made before age 59½ are generally subject to a 10% penalty on the taxable portion, unless specific exceptions apply.

Unlike an IRA, children are not required to have earned income for contributions to occur while under the age of 18. Once the child turns 18, the account will follow the same rules as a traditional IRA, and future contributions require earned income.

The $1,000 Pilot Program

A key feature of Trump Accounts is the federal government’s one-time $1,000 contribution for eligible children born between 2025 and 2028. To receive the contribution, a parent or guardian must submit IRS Form 4547 or complete the election through trumpaccounts.gov. After the election is made, the U.S. Treasury will provide instructions to activate the account.

Children who do not qualify for the pilot contribution may still open a Trump Account but will not receive the $1,000 seed money. Charitable organizations may also contribute; for example, the Dell family has announced a $250 contribution for eligible children under age 10, born before 2025, and living in certain zip codes with a median income below $150,000.

The program is currently scheduled to open for contributions on July 4, 2026, though elections may be submitted in advance.

The Financial Education Opportunity

Trump Accounts may provide a meaningful opportunity to build financial literacy. For many families, this may be their first exposure to long-term investing. Watching an account grow over time can help children develop a stronger understanding of saving, investing, and compounding.

Why Other Vehicles May Be Better for Additional Savings

While the $1,000 pilot contribution is worth claiming, families should carefully consider whether additional contributions to Trump Accounts are appropriate. The primary concern is tax treatment: all investment growth is ultimately taxed at ordinary income rates, which can be as high as 37% at the federal level, plus state taxes.

Better alternatives may already exist depending on your goals:

• 529 plans provide tax-free growth and withdrawals for qualified education expenses, and up to $35,000 may later be rolled into a Roth IRA under certain conditions.
• Custodial Roth IRAs (when the child has earned income) allow contributions that can grow and be withdrawn tax-free in retirement.
• UTMA/UGMA custodial accounts offer surprising advantages: under “kiddie tax” rules, up to $2,700 of dividends and capital gains can be realized tax-free annually for dependent children, funds remain accessible before age 59½, and depending on the investments in the account, they may be taxed at lower capital gain rates, which range from 0-20% federally.
• The creation of a trust for the child’s benefit could offer additional control beyond age 18, flexibility, creditor protection, and estate and GST tax planning benefits for those with large estates. Trusts should be drafted in careful coordination with a qualified attorney.

What About Roth Conversions?

After the child turns 18 and the account becomes a traditional IRA, some families may consider converting the Trump Account to a Roth IRA. The goal would be to pay taxes earlier, potentially at a lower rate, so future growth is tax-free.

However, this strategy can be difficult in practice. If the child is still claimed as a dependent, kiddie-tax rules may cause the conversion income to be taxed at the parents’ rate. In addition, many young adults lack outside funds to pay the conversion tax, and using IRA assets to pay taxes can reduce the value ultimately converted while failing to escape the 10% withdrawal penalty.

What’s Best for Most Families

For most families, the guidance is straightforward: claim the $1,000 pilot contribution if your child is eligible — it is free money with decades to compound. Beyond that, consider carefully before making additional contributions.

Evaluate whether 529 plans, custodial Roth IRAs, or UTMA/UGMA accounts better align with your goals, especially if flexibility or access to funds before age 59½ is important. Trump Accounts have strict withdrawal rules and may be less adaptable than other options.

If you’d like to discuss how Trump Accounts fit into your broader financial plan, contact your Glassman Wealth advisor to explore the most effective strategies for saving on behalf of your children and grandchildren.

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