Children born between 2025 and 2028 will reap a baby shower gift from Congress and President Donald Trump: a $1,000 deposit into a “Trump Account.”
“It’s an IRA for kids,” said Evan Morgan, a principal in the tax advisory group at Kaufman Rossin, an accounting and advisory firm, who spoke to USA Today in August.
The program is part of the tax and spending package signed into law this summer by Trump. They join a crowded field of tax-advantaged savings plans that help Americans navigate the costs of education, health care and retirement, among other things.
What’s unusual in this case is that the accounts start at birth and with a $1,000 balance, deposited by the U.S. Department of Treasury.
That balance is also about to get bigger. Michael Dell, founder and CEO of Dell Technologies, and his wife, Susan, have pledged $6.25 billion to the program that should boost the value of about 25 million accounts by $250, according to a Tuesday announcement.
The historic gift would be for qualified children under 10 who live in ZIP codes with a median family income of $150,000 or less and who won’t get the $1,000 seed money from the Treasury. The Dells hope their gift will encourage families to claim the accounts and deposit more money into it, even small amounts, so it will grow over time along with the stock market.
How do ‘Trump Accounts’ work?
Here’s how the accounts work, according to analyses from Morningstar, the Tax Foundation and other sources.
The government pledges to create an account for any baby born between Jan. 1, 2025 and Dec. 31, 2028, and to fund it with a one-time deposit of $1,000. To qualify, the baby would need a Social Security number.
Parents and others may contribute up to $5,000 a year into the accounts until the child turns 18. An employer may contribute up to $2,500 toward the $5,000 cap. State and local governments and private charities will be allowed to make broad contributions.
No one may contribute to the accounts until July 2026. Other details are still being ironed out.
To claim an account, parents may have to check a box on a tax form testifying that they are new parents, said J. Spencer Williams, founder and CEO of the Retirement Clearinghouse, a financial technology firm.
The new law requires Trump Account funds to be invested in low-cost stock index funds, which mirror the performance of an index such as the S&P 500.
After age 18, Trump Accounts act like IRAs
Parent contributions are after-tax but that money is not taxable when it’s withdrawn. Any earnings on the contributions, however, are taxed when you withdraw them.
You can’t generally withdraw money from a Trump Account until the year a child turns 18. After that, it functions like a traditional Individual Retirement Account.
That means, 20 or 30 years from now, a young adult will be able to withdraw money to cover education expenses or a first-time home purchase without penalties.
You can also hold onto the money until retirement. At age 59 1/2, the early-withdrawal penalties go away.
The accounts were originally designed to be spent by children in their young adulthood. The Senate restructured them into something more like a conventional IRA.
“This became nothing but a retirement account … and there’s nothing wrong with that,” Miklos Ringbauer, a Certified Public Accountant in Southern California, said.
Are Trump Accounts a good investment?
Given the promise of free money from the government, Ringbauer said, it’s hard to imagine many parents will pass up a chance to sign up for an account.
“Anything is better than nothing,” he said. “There are so many kids who start out with nothing.”
The harder question is whether parents should contribute to the accounts over the next 18 years.
If your goal is to save for a child’s education, a 529 education savings account “offers more flexibility and tax benefits,” according to the Tax Foundation.
“I think most parents are going to be better off saving in a 529 for their children rather than this new Trump Account, but it certainly makes sense to collect on the $1,000 contribution,” said Romina Boccia, director of budget and entitlement policy at the Cato Institute, a libertarian think tank.
Monique Morrissey, a senior economist at the left-leaning Economic Policy Institute, predicts Trump Accounts will become “a niche thing,” favored by parents with large portfolios and paid investment advisers.
“I don’t think these are going to take off in a big way,” she said.
The Tax Foundation said the U.S. tax code already provides for “at least 11 different tax-advantaged savings vehicles, each with different rules, limitations and regulations.”
Long-term retirement saving
A Trump Account encourages the kind of long-term retirement saving that financial planners generally recommend. The earlier you invest, the more your investments are likely to grow before you cash them out.
“I’d call it an 18-year head start to retirement,” Neal Ringquist, executive vice president of the Retirement Clearinghouse, said.
The accounts may add another layer of complexity to the tax code. But there’s nothing to stop account holders from consolidating their Trump Accounts with other retirement accounts once they reach adulthood.
“If the money isn’t used, it becomes an ordinary, traditional IRA in its adult life,” Williams said.
The initiative will cost an estimated $15 billion through 2034, at a time when the U.S. government faces a $37 trillion national debt.
Even so, proponents hope the new accounts will inspire a generation of children to gain financial literacy as they build wealth for adulthood.
“This is a really big step forward,” Williams said. “In terms of using the American free market and the opportunity for growth and compounding to help people save for whatever comes next.”
Read more at usatoday.com.