What is a Trump Account? Rules, Taxes, and How They Work for Families

Transcript

I’m ACTEC Fellow Connie Eyster from Boulder, Colorado.

Trump Accounts are what we’re going to talk about today. What is it? And could it help jumpstart your child’s financial future?

In 2025, the One Big Beautiful Bill Act introduced a new investment account for children. It potentially includes a $1,000 federal seed contribution and tax-deferred growth. But before opening an account, it’s important to understand how those accounts work, who qualifies, and what families should consider.

We’re so lucky today to have ACTEC Fellow Susan Bart of both Arizona and Illinois. She’s going to help us better understand this new investment account. Hi, Susan. What an interesting topic.

Susan Bart:  Hi, Connie. It’s a fascinating topic. We’re adding yet another way to save for children to an already very large array of techniques.

What Is a Trump Account and How Does It Work for Children?

Connie Eyster:  So, what is a Trump Account?

Susan Bart:  Well, it’s a newfangled, newly made type of savings account that is intended to encourage long-term investment for children. And after a child becomes 18, will essentially function as an IRA for that child.

Who Qualifies to Open a Trump Account for a Child?

Connie Eyster:  And could anybody open up a Trump Account or who qualifies?

Susan Bart: In general, U.S. citizens who are under the age of 18 and have a social security number can have an account open for them by their guardian or their parent. And one of the major attractions of the law is that for children who are born in 2025 through 2028 — and that just happens to coincide with the current presidential term — are entitled to receive a $1,000 deposit from the government. And that contribution to the Trump Account would be made income tax-free. So, they get a free $1,000 to kickstart their account.

How Does the $1,000 Government Contribution to a Trump Account Work?

Connie Eyster:  And is that deposit automatic or how does that work?

Susan Bart:  All of the details are still being worked out, but we are promised that these accounts are going to be up and operational by July 4th of this year, a year after the bill was passed. And it is looking like there is an IRS form that is in draft format 4547 that can be used to open a Trump Account for a beneficiary and also if the beneficiary qualifies to bequest the $1,000 deposit.

I expect that most accounts are probably going to be open online at a Trump Account website, which will help facilitate opening these accounts. But it is technically two different things that the parent or guardian needs to do.

1. They need to open the account, and
2. They need to make a special election to have it funded with the $1,000.

Where Can Families Open a Trump Account?

Connie Eyster:  And can you open them at your local bank or at an investment institution? Who’s going to hold these accounts?

Susan Bart:  We are all holding our breath waiting to find out what banks or financial institutions will be offering these accounts. What we do know is that these accounts are required by the statute to be invested only in equity funds that are broad-based and consist of primarily only U.S. equities.

So, for example, the S&P would be a possible fund. And the banks that will sponsor these programs also have to have very low fees, less than one-tenth of one percentage point on the investments in these accounts. And they will be administering and holding these funds for the different, for the beneficiaries.

Who Can Contribute to a Trump Account for a Child?

Connie Eyster:  And so, it sounds like if you have a very small child, the government may contribute the initial seed money to the account. But if you have an older child, how are those accounts going to be funded? Can anyone contribute? Can an employer contribute?

Susan Bart:  There are three other ways to contribute to a Trump Account.

1. One is that an employer can make a contribution for an employee, for example, have a teenager working, or for an employee’s child. But the contributions that that employer makes per employee cannot exceed $2,500 each year. So, there is a cap on the amount that they can contribute. And if your employer decides to offer that benefit, that’s wonderful because the contribution to the Trump Account will not be treated as income to the employee. It will just go into the account tax-free.
2. Second type of entity or person who can make contributions is family members. A parent or grandparents can make contributions to the Trump Accounts. They do have a limit, the total contributions by family members and employers per beneficiary cannot exceed $5,000 each year. So, there’s another annual limit there. And we can talk a bit later about why individuals should be cautious about making contributions right now.
3. And the last type of entity is that charitable organizations can have programs that will make contributions to these accounts, but they have to make contributions to a broad group of accounts within a particular geographic area, and that class has to be approved by the IRS.

For example, Susan and Michael Dell have pledged $6.25 billion that they will put into Trump Accounts for beneficiaries under age 10 who are not getting that $1,000 kickstart from the government. But they will be choosing particular geographic areas. My best understanding is that they were likely to be geographic areas where the average income is less than $150,000 per year.

Who Controls a Trump Account and When Does the Child Gain Access?

Connie Eyster:  Let’s say you set up one of these Trump Accounts for your child. Do the parents control the account or is there an age at which the child controls the account?

Susan Bart:  The bank controls the account really until that beneficiary until the year in which the beneficiary turns age 18. There is some limited ability to rollover to a different institution, to a different Trump Account. But for the most part, the funds are just invested and hopefully growing. No distributions are permitted, regardless of the reason.

The only exception is in the year a beneficiary turns age 17, if they have a disability, then you are permitted to roll over their Trump Account into an ABLE Account. Otherwise, in that year the beneficiary attains age 18, the Trump account at that point becomes an IRA for the beneficiary with the beneficiary controlling it. So, the beneficiary at that point could take distributions. There would be income tax and probably penalty tax to pay, but whether or not to take distributions is in the hands at that point of the beneficiary.

How Are Trump Account Withdrawals Taxed Under IRA Rules?

Connie Eyster:  Remind us again a little bit about the IRA rules on withdrawals and how those are taxed to the beneficiary.

Susan Bart:  These Trump Accounts, when the money comes out, it’s very important to understand that almost all of it is going to be subject to income tax at ordinary income tax rates. The only funds that won’t be subject to income tax are the amount that family members contributed to the account. Employer contributions, the $1,000 kickstart, any other contributions and all the growth on them, that will all be subject to tax at ordinary income tax rates at whatever rate bracket the beneficiary is in.

Even though most of the growth in the account, hopefully, would be capital gains and not dividends or interest, it’ll still be taxed as ordinary income to the beneficiary.

When Can Trump Account Funds Be Withdrawn Without Penalty?

Connie Eyster:  And with an IRA, Susan, remind me, what is the age at which you can start taking money out without penalty and how does that fit in with these Trump Accounts? Are there exceptions to having to wait that long?

Susan Bart:  In general, with an IRA and with the Trump Accounts once they flip into an IRA, you need to be 59 ½ in order to take distributions without incurring a penalty. Of course, distributions will still be subject to income tax.

There are a limited number of exceptions for taking distributions earlier. For example, there are some exceptions to help finance higher education, to help purchase a first home, and a few other emergency type disaster relief distributions that could be made. But in general, you want to wait till you’re at least 59 ½, and often people wait until they’re required to begin distributions when they’re in their early 70s or so.

Connie Eyster:  Susan, I want to go back to something you said just a little bit ago about when other folks contribute to the account and that withdrawals of those contributions are an exception to the ordinary income tax rule. When you contribute those funds to the Trump Account, what’s the tax consequence there? Is there an income tax deduction? Is it subject to gift tax? What do we know so far?

What Should Families Consider Before Opening a Trump Account?

Susan Bart:  Well, what we know so far is that the contribution will not be treated as income to the beneficiary when it’s made. The beneficiary just pays income taxes on the way out of the account later on. It is a gift; if somebody is giving money to a Trump Account, it counts as a gift from them to the beneficiary of the Trump Account.

Now, normally, gifts that don’t exceed the annual exclusion each year, which is $19,000 for this year per beneficiary. Normally, those gifts just don’t count, and you don’t have to file a gift tax return. However, for some very technical reasons, the statute here omits some critical language that would qualify these gifts for the annual exclusion. And so, I and many other attorneys believe that under the current law, gifts from individuals to Trump Accounts technically won’t qualify for that gift tax annual exclusion.

What that would mean is even if you put in just $5,000, you’d have to file a gift tax return reporting that gift, and you’d have to use a piece of your lifetime estate tax exclusion covering the gift. I don’t think that’s what the drafters of this legislation intended. And ACTEC has made comments on the legislation pointing out, presumably, this inadvertent error so that it can be either fixed in regulations or by a technical correction to the law. But until we get that fixed, I would be reluctant to put individual contributions into the Trump Account.

Connie Eyster: Great. That’s really helpful advice.

How Do Trump Accounts Compare to 529 Plans, UTMAs, and Roth IRAs?

Susan, thinking about all the different ways that you can put money aside for kids, we’ve got the new Trump Account, we’ve got the 529s, which used to be new, but I guess we’re old now. We’ve got UTMAs (Uniform Transfers to Minors Act). Sometimes we even have Roth IRAs if the minor has taxable income. How do we sort through all these different accounts? What are their pluses and minuses? What’s best suited for what kind of person?

Susan Bart:  I look primarily at two different things. And the first is control. With the Uniform Transfers to Minors Act account, it’s the custodian, the parent or the grandparent who’s controlling the money. They can use it while the child is a minor in ways to benefit the child. And then when the child reaches the statutory age, usually between 18 and 21, the beneficiary has a right to withdraw the UTMA account. And at that point, the money is the beneficiaries, and they can spend it however they want.

That is similar on the control issue to the Trump Account, because the beneficiary will have control of the account once they turn age 18. And although there may be adverse tax consequences, they can take the distribution, incur the tax on the penalty, and then spend the remainder however they want. And many 18-year-olds might be tempted to spend the Trump Account funds in ways that their parents or grandparents wouldn’t approve of initially. In contrast with a 529 account, you have an account owner who’s controlling the distributions, and there is no age at which the beneficiary gets to take control of that account.

The second primary difference to look at is the taxation on distributions from the account. With a 529 account, when distributions come out, if they’re used for any of the qualified education expenses spelled out in 529, there’s no income tax on the distribution. And that includes nowadays, 529 just keeps getting better and expanding. It’s not only college and graduate school, there’s primary and secondary school you can make distributions for. You can also make distributions for vocational training and apprenticeship and a broad array of different types of education relation expenses.

In contrast, when distributions are made from the Trump Account, they are going to incur income tax except for the amount of contributions that were put in by individuals. And on a UTMA account, there’s no special tax when the funds are turned over to the beneficiary.

In general, I think 529 accounts are going to be the better vehicle for most people. If you have fully funded your 529 account and you’re really afraid of putting any more funds into it because you’re afraid that you won’t be able to spend them on education-related expenses, then perhaps you’d want to consider either a trust or the child if there’ll be significant additional contributions. And if you just want to make smaller additional contributions, then a Trump Account might be an appropriate idea.

What Should Families Consider Before Opening a Trump Account?

Connie Eyster:  Susan, are there any final comments you have yet to sum up your thoughts on Trump Accounts for folks that are contemplating opening one up? What are some of the takeaways?

Susan Bart:  I think some of the takeaways are with so many different giving vehicles out there, and we only touched on a handful of them. There’s at least as many more that we didn’t touch on today, that if you have any questions, you should reach out to your advisor, your attorney, your financial advisor, and think carefully about how the money will be used and what the different tax consequences of the different vehicles are.

By all means, if you have a child who’s going to qualify for the $1,000 governmental contribution or for one of the contributions from other charitable contributors, open up a Trump Account. But think hard before you decide whether that’s the place you want to put your individual contributions.

Connie Eyster: Terrific. What a great summary. Thank you, Susan, so much for that wonderful discussion about Trump Accounts. It’s so valuable and so much good information.

For those that want more information, feel free to go to actec.org/trump-account as we’ll be posting for updates on Trump Accounts as they develop.