Starting early is one of the most effective ways to build long-term wealth, thanks to the power of consistent savings and compounding returns. Trump Accounts were introduced as a way to expand wealth-building opportunities for young Americans beyond traditional retirement vehicles. These new tax-advantaged accounts for minors could give families a meaningful head start on saving and investing. Before deciding whether one is right for your family, here are seven important things to understand:
1. The accounts grow tax deferred, but withdrawals are taxed. Investments grow tax-deferred, similar to a traditional IRA. Withdrawals are taxed at the child’s ordinary income rate, with family contributions treated as part of the account’s cost basis. By contrast, withdrawals from a 529 plan are tax-free when used for eligible education expenses.
2. Withdrawal rules are fairly strict. Funds generally cannot be withdrawn until the child turns 18. After that, withdrawals taken before age 59½ may still be subject to a 10% early withdrawal penalty unless they qualify for an approved exception such as education expenses, a first home purchase, or starting a business.
3. The account beneficiary cannot be changed. Unlike a 529 plan, where the account owner can change the beneficiary at any time, the child gains full control of their account at age 18.
4. Annual contributions are capped. Contributions are limited at $5,000 per year (indexed for inflation after 2027). Employers may contribute up to $2,500 annually per employee (also indexed for inflation after 2027), not per account.
5. Investment options are limited. During the growth period, account assets must be invested in broad U.S. equity index funds. Leverage is not permitted, and annual fees and expenses are capped at 0.1%.
6. Some children may qualify for outside contributions. U.S. citizens born between 2025 and 2028 are eligible for a one-time $1,000 seed contribution from the federal government. Some employers and private foundations are also planning to make contributions to these accounts.
7. State tax treatment may vary. Some states (including PA and CA) plan to tax annual earnings within these accounts. States may also tax employer contributions and/or Qualified General Contributions.
Takeaways
A Trump Account may be a good fit if:
- The child is eligible for the $1,000 federal seed contribution
- A parent's employer offers contributions to the account
- The child qualifies for a seed deposit from organizations such as the Dell Foundation
- You want tax-deferred savings earmarked for non-education qualified expenses, such as a future home purchase
A 529 plan is generally the better vehicle for education savings:
- Withdrawals for education expenses are tax-free
- Up to $10,000 per year can be used for K–12 education expenses (limits vary by state)
- Up to $35,000 can be rolled into a Roth IRA if funds aren't needed for education (subject to certain rules)
- The account owner can change the beneficiary at any time for any reason to an eligible family member
- Higher annual contribution limits, with the option to front-load five years of contributions without triggering gift tax
For children with earned income, a Roth IRA may offer greater long-term benefits:
- Qualified withdrawals are 100% tax-free
- Contributions can be withdrawn at any time without taxes or penalties
- Higher annual contribution limits
This material is provided for informational and educational purposes only and does not constitute investment, tax, or legal advice. The information contained herein is based on sources believed to be reliable but is not guaranteed as to accuracy or completeness. Tax laws and regulations are subject to change; please consult a qualified tax professional or financial advisor regarding your specific situation. RiversEdge Advisors is a registered investment adviser. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results.