985. Laura answers a listener's question about what parents need to know about setting up Trump Accounts for kids.
985. Laura answers a listener's question about what parents need to know about setting up Trump Accounts for kids.
Find a transcript here.
Have a money question? Send an email to money@quickanddirtytips.com or leave a voicemail at (302) 364-0308.
Find Money Girl on Facebook and Twitter, or subscribe to the newsletter for more personal finance tips.
Money Girl is a part of Quick and Dirty Tips.
Links:
https://www.quickanddirtytips.com/
https://www.quickanddirtytips.com/money-girl-newsletter
https://www.facebook.com/MoneyGirlQDT
Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! I love hearing from you; so, if something finance-related is on your mind, leave me a voicemail at 302-364-0308.
Today’s terrific question is an email from Sandy in Hopkinsville, Kentucky, who says, “Thanks so much for all you do–I love your podcast! I’ve been reading about the new Trump Accounts, which are like IRAs for children, with a $5,000 contribution limit. It sounds like a great opportunity for the younger generation! Can you explain how these accounts work in layman’s terms?”
Thanks for your question, Sandy! If you’re a new parent or will be one in the next few years, don’t miss the opportunity to open a Trump Account and give your child a financial head start in life. This post will review how these accounts work and tips for maximizing them.
RELATED: Starting a family? 10 things new parents should know about money
What is a Trump Account?
There’s a new regulation that creates a long-term, tax-advantaged savings account for children, known as a Trump Account. It’s designed to give the next generation a financial head start, building wealth they can use for any purpose, such as buying a home, attending college, or eventually retiring.
As Sandy mentioned, a Trump Account is like an individual retirement account (IRA) for those under 18 with a Social Security number. It must be set up and managed by a parent or guardian. However, the funds can’t be withdrawn until the account beneficiary is 18, unless an exception applies.
Once a Trump Account owner turns 18, it converts into a traditional IRA in their name, and they control it. But unlike a regular IRA, a child doesn’t need to have earned income to qualify for contributions to a Trump Account.
What are the benefits of a Trump Account?
The massive benefit of opening a Trump Account is that the U.S. Treasury will make a one-time $1,000 contribution to accounts for children born between January 1, 2025, and December 31, 2028. The $1,000 benefit is available for children born during those four years, as long as a Trump Account is opened for them before their 18th birthday.
Like a traditional IRA, a Trump Account is tax-deferred, allowing funds to grow without being taxed each year. That’s a huge benefit compared to investments in a regular brokerage where you must pay taxes on capital gains, dividends, and interest annually.
However, once a Trump Account converts to a traditional IRA, withdrawals get taxed as ordinary income. In addition, tapping the account before reaching age 59.5 means paying an additional 10% early withdrawal penalty, unless an exception applies (such as using up to $10,000 for a first-time home purchase or paying for higher education).
The Trump Account annual contribution limit for 2025 and 2026 is $5,000 per child, not including the government’s $1,000 addition. Contributions for a child’s account can come from family, friends, charitable organizations, and employers (of a parent or the child). However, employers can only contribute up to $2,500 of the $5,000 total. But it can be excluded from the child’s taxable income.
The investments you can choose for a Trump Account are limited to index funds and exchange-traded funds (ETFs) that track a broad U.S. financial market, such as the S&P 500. That promotes ownership in diversified investments with low fees.
After age 18, any new contributions the account owner makes must be based on their own earned income and comply with annual IRA limits.
What could a Trump Account be worth in the future?
Parents can always save for a child’s future using a taxable brokerage account or a tax-advantaged 529 plan for education expenses. But getting $1,000 in seed money from the government might encourage parents of kids born from 2025 through 2028 to start investing for them sooner rather than later.
Let’s say a child born in 2025 gets a Trump Account with $1,000 and doesn’t receive any additional contributions. If the funds grow decade after decade, earning an average 7% return, the account would be worth:
But if the same child’s Trump Account is maximized annually with an average 7% return, the account would be worth at least $184,171 by their 18th birthday. That assumes a starting balance of $1,000 from the government and $5,000 annual contributions, which is conservative since the allowable contribution is likely to increase in most years.
Funding a tax-advantaged Trump Account for a newborn means they’re likely to enjoy significant growth due to the power of compounding. Even if a family can’t max out a Trump account annually, even modest contributions can reach an impressive balance over decades.
LISTEN ALSO: Traditional or Roth IRA–which is better?
Is a traditional or Roth IRA better for young investors?
Once a child has qualifying income, such as from a part-time job or self-employment, they qualify for either a traditional or Roth IRA. Instead of funding a Trump Account, which gets treated like a pre-tax, traditional IRA considers the benefits of using a Roth IRA instead.
With a Roth IRA, you make after-tax, non-deductible contributions and can make tax-free withdrawals in retirement. Therefore, even if your Roth IRA mushrooms with massive investment growth, you get to skip the taxes in retirement, which is a huge deal!
Additionally, there are no required minimum distributions (RMDs) with a Roth IRA, as with a traditional IRA. Your Roth IRA funds can stay in the account and easily get passed to your heirs.
Another significant Roth IRA benefit is that it's less punitive for taking early withdrawals before age 59.5. Since you pay tax upfront on Roth contributions, you can take them as penalty-free distributions anytime. However, withdrawals of earnings would be subject to taxes plus a 10% penalty if you're younger than 59.5.
Unlike a traditional IRA, you can only contribute to a Roth IRA when you earn less than an annual threshold, which is typically not a problem for young investors. For 2025, the contribution limit for a Roth IRA is the same as a traditional IRA, up to $7,000 or $8,000 if you're over 50. For 2026, the limit will increase to $7,500 or $8,600 if you’re over 50.
However, you can’t contribute more than your annual income. For example, if a 16-year-old has a part-time summer job and earns $4,000 for 2025, they could only contribute $4,000 to a Roth IRA. But they, their relatives or employer could also contribute a total of $5,000 to their Trump Account for the year.
LISTEN ALSO: What types of income qualify for an IRA contribution?
What are the benefits of using a Roth IRA?
Consider the following Roth IRA benefits.
How to open a Trump Account
To open a Trump Account for a child born in the years 2025 through 2028, submit IRS Form 4547, Trump Account Elections, at any time. You can visit TrumpAccounts.gov to learn more.
Starting in May 2026, the U.S. Treasury will send information on how to activate the account and receive the $1,000 benefit. The earliest you can begin making Trump Account contributions will be July 4, 2026.
Initially, all Trump Accounts will be created and held with the Treasury’s designated financial agent. But at a later date, parents or guardians can transfer them to their preferred brokerage firm through a direct trustee-to-trustee rollover.
Thanks again to Sandy for sending in this timely question! Remember, you can also email me with a question or comment via my contact page at LauraDAdams.com. While you’re there, sign up for The Money Stack, my Substack newsletter. You can subscribe for free or support the show by becoming a paid member and getting access to my live educational and Q&A events!
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, Rebekah Sebastian is our marketing and publicity manager, and Nathaniel Hoopes is our marketing contractor.