HOW THE NEW “TRUMP ACCOUNT” WORKS – AND WHY YOU SHOULD THINK TWICE BEFORE CONTRIBUTING

The recently passed “Big Beautiful Bill” (BBB) includes a provision creating a so-called “Trump Account” for all U.S. citizens born between 2025 and 2028. Each eligible child will receive a $1,000 contribution from the government, which must be invested in an index fund tracking the broad stock market, such as the S&P 500.

These accounts can also be opened for any child under age 18, but they will not receive the $1,000 starting deposit from Uncle Sam.

Parents are allowed to contribute up to $5,000 per year on behalf of the child. However, due to the account’s tax treatment, this is unlikely to be a smart financial move.

HERE’S HOW THE RULES WORK:

• At age 18, the child can withdraw up to half of the account balance, but only for qualified purposes such as college education, purchasing a home, or starting a business.
• At age 30, there are no restrictions on withdrawals. However, only withdrawals used for qualified purposes will be taxed as long-term capital gains. Any other use will be taxed as ordinary income.

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And there’s the catch: the account is never truly tax-free. Withdrawals are either taxed as earned income or taxed at the (currently) lower long-term capital gains rate if used for qualified expenses.

This raises an important question:

Why would a parent contribute to this account rather than keep the money in a standard taxable investment account, which would almost certainly qualify for long-term capital gains treatment upon sale?

Given that the account only offers broad market index funds—already highly tax-efficient investments—there seems to be little incentive to lock up funds in this restrictive account when a parent could instead retain full control and flexibility in a regular brokerage account.

Using historical data, the S&P 500 has averaged approximately 10% annual returns over the long term. Adjusting for average annual inflation of roughly 2.5%, the real annual return is closer to 7.5%.

Using the compound interest calculator at investor.gov, here’s what happens to the initial $1,000 government contribution:
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• At age 18, it would grow to about $3,675.80 in today’s dollars. With half available for qualified expenses, that’s $1,837.90—barely enough to cover a semester or two of textbooks, let alone meaningfully contribute toward buying a home or launching a business.
• By age 30, the account would grow to approximately $8,754.96 before taxes. Helpful, but far from life changing.
• If left untouched until retirement at age 65 the balance adjusted for inflation could grow to just over $110,000

One provision in the bill does stand out: employers can contribute up to $2,500 per year income tax-free.
For self-employed parents, this creates a potential tax planning strategy:
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• Parents who employ their children for legitimate business work can contribute up to $2,500 to the child’s Trump Account.
• Currently, no earnings requirement applies to employer contributions. Even if a child earns only $600 for the year, parents can still contribute the full $2,500.
• These contributions are not treated as wages, meaning no income tax, Social Security tax, or Medicare tax is due on those dollars.

For the right family business situation, this provision could generate significant tax savings, allowing parents to shift income to their child’s account and potentially benefit from the child’s lower tax bracket when withdrawals are made; however, in the end any withdrawal will be subject to income tax as either ordinary income or long-term capital gains at the child’s rate in the year withdrawn.

​While the initial $1,000 government gift is a nice gesture, parents should think carefully before making additional contributions. The account’s restrictive withdrawal rules and its tax treatment make it far less attractive than a standard taxable investment account. However, self-employed parents may find valuable tax planning opportunities by leveraging the employer contribution provision.