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Infographic: Trump Account Explained – When is it Really a Good Deal?
Trump Accounts Explained
The government is giving your child a free $1,000 through the Trump Account – but if you plan to use it for college, you could cost your child $5,000!
I passed the CFP® exam at 16 and have helped millions improve their finances over the last 8 years.
Here’s exactly how Trump Accounts work, how to avoid the mistakes most parents will make, and the only Trump Account strategy that actually makes sense.
How a Trump Account Works: What is it, Eligibility, Limits and Restrictions
A Trump Account is an investment account for any child under 18, and it launched in July 2026.
If your child was born between January 1, 2025 and December 31, 2028, the government hands them a free $1,000.
And you claim it by filing IRS Form 4547, which only takes a few minutes.
After that, you or anyone else – like grandparents – can add up to $5,000 total per child each year.
Your employer can cover up to $2,500 of that, either as an extra perk or by allowing you to contribute through paycheck deductions – both completely tax-free.
The money has to be invested in low-cost U.S. index funds like one that tracks the S&P 500, which is a basket of the 500 largest American companies.
This is great since you can’t accidentally choose an expensive or risky investment for your child.
On January 1 of the year your child turns 18, the account becomes a Traditional IRA they own completely.
So if they use the money before they’re 59 1/2, they’ll pay taxes and a 10% penalty – although there are some exceptions we’ll go over soon.
Here’s the tricky part: when you put money into your own IRA, you don’t pay tax on the contribution. You only pay tax on the withdrawals.
But for Trump Accounts, you pay tax on contributions. And your child will also pay tax on the appreciation when they withdraw money in retirement.
So you’re getting the worst part of an IRA without the benefit.
Don’t worry – later I’ll show you the one way it actually makes sense to use a Trump Account.
Using a Trump Account for College Savings
Picture Maya, a mom who uses a Trump Account as her son’s college fund.
She puts in $200 a month from the day her son is born and never misses a month. That’s around $43,000 out of her pocket.
Invested in the stock market, it’ll grow by 11% per year and become $121,000 by his 18th birthday, and $78,000 of that is pure growth.
Here’s where it falls apart for Maya. The IRS waives the usual 10% early-withdrawal penalty since the money is for college. But there’s still income tax.
Imagine her son takes out $40,000 for sophomore year tuition. $26,000 of this is growth – which is taxed as ordinary income.
And because this income is not from a job, something called “Kiddie Tax” kicks in.
Long story short, depending on your total income you could easily end up losing over $5,000 to the IRS.
But if Maya invested using a 529, which is designed specifically to save for college, all of the withdrawals would be completely tax-free, and her son won’t lose $5,000 every year.
But there is an even more expensive mistake you have to avoid.
Using a Trump Account for Retirement Savings
The unnecessary taxes don’t end there.
If your teenager earns some money at a summer job and invests it in their Trump Account, they’ll have a good nest egg ready for their retirement.
But since the IRS treats withdrawals as ordinary income, all that money will be taxed, which could cost them tens of thousands of dollars.
But again, there’s a better way.
If your teen has earned income – like from a summer job, babysitting, or mowing lawns – they can have a Custodial Roth IRA. It’s just a Roth IRA that you manage until they turn 18.
Here’s the best part: unlike with a Trump account, your teen will never have to pay taxes on the withdrawals in retirement.
So for the same contribution and no extra work, they’ll have far more money than if they used a custodial Roth IRA.
The Smart Way to Use a Trump Account
So there’s a better alternative for college, and another one for retirement. Then when should you actually use a Trump Account?
There’s really only one way it makes sense, which is to claim the free $1,000 if your child was born between 2025 and 2028.
Invest it in index funds, and forget about it.
I know it doesn’t sound exciting, but this is not insignificant: the $1,000 will grow into more than half a million dollars by the time your child turns 60.
But this is only the beginning.
Check this out to give your child a real head start by learning the 9 money rules rich parents use to raise millionaires, so you can teach them habits that last a lifetime: Rich vs Poor Mindset: 9 Money Rules Parents Use to Raise Millionaire Kids