With the introduction of Trump Accounts under President Trump’s Working Families Tax Cuts Act, also known as the One Big Beautiful Bill Act (or OBBBA), a new opportunity has been created for American families to set up tax-advantaged savings accounts for their children younger than 18, and for those born between January 1, 2025, and December 31, 2028, to participate in a pilot program contribution of $1,000 made by the government.
Overview of Trump Accounts
Trump Accounts are innovative savings vehicles akin to individual savings accounts (IRAs) designed to help families build wealth from the birth of a child. For a child born in 2025 through 2028, they come with the option of receiving a one-time $1,000 government seed contribution. Additional contributions of up to $5,000 annually, adjusted for inflation, are permitted up to the year before a child turns age 18. The funds are invested in broad, and low-cost, stock market index funds, providing a substantial growth potential over time.
Eligibility and Contributions
Any child under 18 with a valid Social Security number can have a Trump Account, which is managed by a parent or guardian until the child reaches adulthood. These accounts are inclusive, allowing contributions from a wide range of sources.
1. Eligibility to Contribute:
- Contributions to Trump Accounts can be made by various parties, including children, parents or guardians, grandparents, family members, friends, and employers. The standard annual contribution limit starts off at $5,000 per child and will be adjusted for inflation in the future.
- Contributions are not tax deductible (but see next bullet).
- Employers can contribute up to $2,500 annually towards the $5,000 cap. The employer is allowed a deduction for the contribution, and it is not taxable to the employee.
- To ensure the annual $5,000 contribution limit to Trump Accounts is not exceeded, robust safeguards must be put in place due to the diverse array of qualified contributors. A centralized record-keeping system should be established to monitor all contributions made under each child’s account, requiring real-time updates and access for contributors to verify current contribution levels. Contributors should be encouraged or mandated to register their planned contributions in advance, allowing the system to automatically flag any attempts that would exceed the limit. Additionally, implementing automated alerts for both contributors and account holders upon approaching the $5,000 threshold can prevent unsolicited over-contributions. Transparent communication channels and clear guidelines on contribution reporting obligations will also be crucial. By integrating these comprehensive systems and procedures, the integrity of the annual contribution cap can be effectively upheld, avoiding any missteps that could potentially disrupt the intended benefits of the Trump Accounts.
2. Qualified Class Contributions: Qualifying charitable organizations and government entities (such as states, tribes, and localities) are also eligible to make contributions. However, these entities (charities and governmental bodies) must specify a “qualified class” of account beneficiaries to whom the contribution is to be distributed. This means the contributions are directed towards a defined group of beneficiaries, such as all children born in a specific year or within a certain geographic area, rather than to individual accounts without specification.
This framework allows charitable organizations and government entities to significantly contribute to the foundational development of these tax-advantaged savings accounts for the eligible children.
Example: Michael and Susan Dell, through the Michael & Susan Dell Foundation, are contributing $6.25 billion to seed Trump Accounts with $250 for children who are 10 or under who were born before Jan. 1, 2025. The pledged funds will cover 25 million children age 10 and under in ZIP codes with a median income of $150,000 or less.
The $1,000 Government Seed Contribution
The federal government will provide a one-time $1,000 contribution to eligible Trump Accounts. This seed money is intended to give newborns a financial jumpstart through long-term investing in the stock market. The government seed amount applies to a specific cohort of children:
- Birth Date Range - The child must be born on or after January 1, 2025, and before January 1, 2029.
- Citizenship - The child must be a U.S. citizen with a valid Social Security number.
- Account Opened - An election must be made by a parent or guardian to open a Trump Account on the child’s behalf.
- One-Time Contribution - It is a one-time, initial deposit of $1,000; the government does not make recurring contributions.
- Does Not Count Toward Limits - The government’s $1,000 contribution does not count toward the annual private contribution limit (currently $5,000).
- Taxed Upon Distribution - The $1,000 seed amount, along with investment earnings, grows tax-deferred but is considered pre-tax money and will be taxed as ordinary income when withdrawn after age 18.
Children born outside this four-year window (e.g., before 2025) are eligible to have a Trump Account opened for them and receive other benefits (like potential employer contributions and those from charitable organizations like the Dell Foundation), but they will not receive the $1,000 government seed money.
Investment Strategy
Trump Accounts must adhere to specific investment rules: they can only invest in broad U.S. equity index funds that do not use leverage and charge minimal fees. This restriction aims to simplify the investment process and ensure transparency while capitalizing on the growth potential of the U.S. stock market.
Tax Implications
For taxpayers, understanding the tax implications of Trump Accounts is critical. Like a Roth IRA, contributions are not tax deductible, but like a traditional IRA the earnings grow tax-deferred until withdrawn. Once the child reaches 18, the account follows standard IRA withdrawal rules, including potential taxes and penalties for early withdrawals.
- Distributions Before Age 18 - Distributions from Trump Accounts are not permitted until the account beneficiary reaches the age of 18. This restriction ensures that the funds are preserved and potentially grow within the account until the beneficiary comes of age.
In the unfortunate event that a child with a Trump Account dies, the funds within the account can be transferred to the child’s estate, or alternatively, the account can be transferred to a designated survivor or beneficiary specified for such circumstances. It’s essential to have clear directives in place to manage these accounts ensuring that the transfer of funds is handled smoothly and according to the account holder’s intentions.
- Distributions After Age 18 - When the beneficiary is 18 or older, distributions have two components:
- After-tax contributions (made by parents, relatives, etc.) can be withdrawn tax-free because taxes were already paid on the money before it was contributed.
- Pre-tax contributions/amounts (such as earnings on investments, the $1,000 government seed grant, and employer/charitable contributions) are taxed as ordinary income upon withdrawal.
- Penalty - Additionally, a 10% early withdrawal penalty generally applies to taxable distributions taken before the beneficiary reaches age 59½, unless an exception applies.
- Tax-Exempt Scenarios (Exceptions to the 10% Penalty) - While the pre-tax portion of the distributions is still subject to ordinary income tax, the 10% penalty may be waived if the funds are used for “qualified expenses” once the child is 18 or older:
- Higher Education Expenses: Tuition, fees, books, and other related costs for post-secondary education.
- First-Time Home Purchase: Up to $10,000 may be used for a down payment on a first home.
- Birth or Adoption: Up to $5,000 can be used for qualified expenses related to the birth or adoption of a child.
- Disability Expenses: Expenses related to the disability of the beneficiary.
- Other exceptions: Including disaster recovery and terminal illness.
Account Management and Transfers
To open a Trump Account, guardians must use IRS Form 4547, Trump Account Election(s), or an online tool or application at trumpaccounts.gov. Form 4547 can be filed with a taxpayer’s 2025 tax return while the online tool/application won’t be available until sometime in mid-2026. And accounts cannot begin to take contributions until July 4, 2026.
Accounts are initially held with the Treasury’s designated agent, but they can be transferred to a preferred brokerage, offering flexibility once the initial setup is complete.
This transferability is an advantage for account holders, allowing them to manage their investments actively and to select financial institutions that best align with their financial goals and service preferences.
| IMPORTANT |
| If you have a child or children under the age of 18, be sure Form 4547 is filed with your tax return if you want to elect a Trump Account for your children. The form accommodates 2 children, and multiple forms can be filed. It requires the name and SSN of the parent/guardian with their contact information. It also requires the name, SSN, date of birth and home address of the child. Importantly, it includes a box that must be checked if you want the child (born after January 1, 2025, and before January 1, 2029), to receive a $1,000 government contribution to their Trump Account. |
Please contact our office with questions and for filing assistance.
