Starting in 2025, every American newborn will receive a $1,000 government-funded investment account. The Trump administration has said that the new accounts will “chart the path to prosperity for a generation of American kids,” but experts are divided about their ultimate utility.
Dubbed “Trump accounts,” the program is a key part of the latest Republican tax and spending package signed into law on July 4. Trump accounts are structured somewhat like IRAs but come with their own rules.
Parents will be able to open one for any child under the age of 18, though those accounts will not be eligible for the $1,000 seed money. Annual contributions are capped at $5,000, including up to $2,500 in potential tax-free employer contributions. In a show of support last month, Dell Technologies CEO Michael Dell said his company would match the government’s contribution for employees’ children. Other companies have voiced tentative support for the program but did not promise to contribute to the accounts.
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Funds in the account can only be invested in low-cost, broad stock indexes, where they grow tax-deferred until withdrawal. Account holders can begin making partial withdrawals at age 18 and can access the full balance at age 25, but only for qualified uses like college expenses, launching a business or purchasing a first home. At age 30, they gain unrestricted access to the funds.
Withdrawals for approved purposes are taxed at the long-term capital gains rate, while nonqualified uses are taxed as ordinary income and may be subject to an additional 10% early withdrawal penalty.
A mixed reception among tax and finance experts
Organizations like the nonprofit, nonpartisan Tax Foundation have been skeptical about how the new account fits into the landscape of existing options for parents.
“The tax code provides for at least 11 tax-advantaged savings vehicles, each with different rules, limitations and regulations,” analysts at the Tax Foundation wrote. “The addition of the Trump Accounts would further complicate savings for taxpayers who would have to keep track of yet another account.”
A Trump account will provide less generous tax advantages than other popular vehicles, like the 529 savings plan. While Trump accounts will allow for tax-deferred growth, they fall short of providing the tax-free earnings that savers can receive through a 529 plan. Still, the initial $1,000 seed funding, available to babies born between 2025 and 2028 as a pilot program, makes Trump accounts an enticing option for many prospective parents, advisors say.
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“We’re getting a lot of questions about it, especially from some of our clients in that family-starting age, like late 20s to 40s,” said Matthew Theal, a financial advisor at Evermont Wealth in Claremont, California. “But yeah, to me, I still think long term a 529 [plan] probably wins out if you’re using it specifically for college, and then you want it for retirement in the future down the line.”
If education or retirement savings is the goal, traditional 529s and Roth IRAs are better options from a tax perspective, said Jeffrey Fratarcangeli, founder of Fratarcangeli Wealth Management in Bloomfield Hills, Michigan. But the Trump account still offers a unique value, he said.
“All in all, this has great potential to be a component to the financial security of our children,” Fratarcangeli said. “It is another piece of the puzzle, and even on a standalone basis, the growth potential can provide capital formation to many that may have no other avenues.”
Is just starting enough?
In terms of tax-advantaged growth, the Trump account falls short of other established savings accounts already available to parents. But for people like Zach Buchwald, CEO of Russell Investments, the account still represents a “big cultural shift” for American families, thanks in no small part to its $1,000 seed.
The average parents, by default, don’t think about investing for their children, Buchwald said. But a funded investment account could change that.
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“They create a baseline expectation: Every kid starts with something in the market,” Buchwald said. “That’s a big cultural shift. And by expanding eligibility to include employer and nonprofit contributions, it opens up a lot more opportunities that many families haven’t had access to before.”
Still, whether or not parents will choose to contribute their own money to a Trump account over a 529 or other established account remains an open question, according to Theal.
“I would imagine a lot of people are kind of wary about the accounts,” Theal said. “They’ll take the free $1,000, right? I mean, that’s amazing. But the annual contribution of $5,000, you know, I’m just not sure.”
“I don’t know if families are actually going to make that annual $5,000 contribution, or if they’re going to be, you know, wary or nervous about it, since it is a government-funded program,” he added. “We’ve already seen a lot of negatives over the last 30 years with Social Security, how it’s eventually going to run out, and a lot of people don’t trust that system.”
