Free Money for Your Kids? Understanding the New Trump Accounts

You may have heard some buzz recently about a new type of savings account created by the 2025 One Big Beautiful Bill Act, or OBBA. They’re being called “Trump Accounts,” and they’re designed as a new savings vehicle for children.

Anytime a new government program involving money is announced, it’s wise to approach it with a healthy dose of curiosity and caution. Is this a golden opportunity or a complicated mess? As with most things in finance, the answer is: it depends.

So, let’s walk through what these new accounts are, how they work, and most importantly, how you can decide if they make sense for your children or grandchildren.

What Exactly Is a Trump Account?

Think of a Trump Account as a starter investment account for a child, kicked off with a gift from the government. Under the new law, every eligible child born between 2025 and 2028 will receive a $1,000 contribution from the U.S. Treasury to open the account. This initial $1,000 "seed money" is provided regardless of the family's income, which makes it a compelling starting point for everyone.

After the account is established, it can grow in a few ways:

• Family Contributions: Parents, grandparents, or other relatives can contribute up to $5,000 each year in after-tax dollars until the year before the child turns 18.

• Employer Contributions: Some companies may also choose to contribute. Employers can add up to $2,500 per year, and this money is not considered taxable income for the child. In fact, some large employers are already showing support for the program.

• Investment Growth: The money in the account must be invested in low-cost mutual funds or ETFs that are primarily made up of U.S. stocks. The earnings in the account then grow tax-deferred, meaning you don’t pay taxes on the dividends or capital gains as they accumulate year after year.

How Can the Money Be Used?

This is where things get a bit more complex. The rules for taking money out depend on the child’s age and what the money is being used for.

Starting on January 1 of the year the child turns 18, they gain full control of the account and can withdraw the entire balance for any reason. This introduces what I call a "behavioral risk"—the temptation for an 18-year-old to cash out for a new car instead of preserving the funds for long-term goals.

Withdrawals before age 59½ are generally hit with a 10% early withdrawal penalty, on top of regular income tax. However, there are a couple of important exceptions. The 10% penalty is waived if the money is used for:

• Qualified higher education expenses.

• Up to $10,000 toward the purchase of a first home.

After age 59½, the account holder can withdraw funds for any reason without a penalty, though they will still owe income tax on the taxable portion.

The Complicated Tax Picture: This Is Critical to Understand

The tax rules for Trump Accounts are what truly set them apart—and not necessarily in a good way. They lack the key advantages of other accounts you might be familiar with. There’s no upfront tax deduction like a traditional IRA, and withdrawals are not tax-free like they are in a Roth IRA or a 529 plan used for education.

Here’s the most important takeaway: withdrawals are taxed proportionally.

Let’s break that down. The money in the account is a mix of taxable and non-taxable dollars.

• Non-Taxable: Your personal after-tax contributions.

• Taxable: The $1,000 federal seed money, any employer or charitable contributions, and all the investment earnings.

Imagine the account is a big glass of water. Your contributions are the plain water. The government’s seed money and all the investment growth are like stirring in a powdered drink mix. You can’t just take a sip of the plain water; every sip you take will have the same proportion of water and drink mix.

Let’s use a real example. Say you contribute $10,000 to your child’s account. It receives the $1,000 from the government and has $4,000 in investment earnings.

• Total Value: $15,000

• Your Contributions (non-taxable): $10,000

• Taxable Portion: $5,000 ($1,000 seed money + $4,000 earnings)

In this case, one-third ($5,000 / $15,000) of the account is taxable. This means that one-third of any withdrawal will be taxed as ordinary income. If your child pulls out $6,000 for college, $2,000 of it is considered taxable income, even though it's for a "qualified" use. The term "qualified use" only saves you from the 10% penalty; it does not make the withdrawal tax-free.

So, What's the Verdict?

Given the tricky tax rules, when does a Trump Account make sense?

1. Take the Free Money: The $1,000 government seed deposit is a fantastic head start. It seems wise for any eligible child to have an account opened to receive these funds. For many families, this might be the only contribution they make.

2. Compare to a 529 Plan for College: If your primary goal is saving for college, a 529 plan is almost certainly a more powerful tool. 529 plans offer much higher contribution limits and, most importantly, withdrawals are completely tax-free when used for qualified education expenses.

3. Consider it for Supplemental Savings: If you are a high-income family that is already maxing out contributions to a 529 plan, a Trump Account could serve as a secondary vehicle for long-term savings—perhaps as a way to give your child a jump-start on their own retirement nest egg.

My advice is to be cautious. It's essential to look at other, more flexible and tax-friendly savings options before committing your own hard-earned money to a Trump Account. While the initial government contribution is a great benefit, the complex tax treatment and withdrawal rules mean it may not be the best fit for everyone's broader financial plan.