The tax cuts for working families bill created Trump accounts, which are essentially IRAs for children. Although contributions cannot be made until July 4, 2026, parents are noticing a new savings option – endowed with $1,000 by the government.
And with tech billionaires Michael and Susan Dell offering to invest between $6 million and $25 million more in savings accounts, people may be wondering, “What is a Trump account and what’s the catch?”
The “IRA for kids” concept has been around for a while, Sarah Brenner, director of education at Ed Slott and Company, told Yahoo Finance.
“It’s been proposed many times over the years under different names, so it’s not new,” Brenner said. One point of confusion is that the Trump accounts are strictly for education spending. This is not the case.
“At 18, accounts become available and you can use them however you want. It’s not limited to education or anything else,” she said.
However, there is a catch.
Learn more: Trump accounts explained: how they work and who is eligible
There are really no “cons” here. In many ways, Trump accounts are IRAs, with just specific allocations and restrictions before age 18. A person must have earned income to contribute to an IRA, while Trump accounts do not have this limitation.
Parents, grandparents — and even employers — can contribute to the Trump account during the “growth period” before the child’s 18th birthday. However, the money is “stranded,” Brenner said. It is not accessible. There are no exceptions or qualified distributions.
“But at age 18, these accounts essentially become traditional IRAs. When the child turns 18, they can use the money however they want. But there will be taxes, and there will be a 10 percent penalty if you’re under 59 1/2 on the taxable portion of the accounts,” Brenner added.
Like a traditional IRA, the money is intended for retirement. Withdrawals will always be taxed according to the account holder’s current income tax bracket. If the Trump account is tapped after the child turns 18 but before age 59½, they will have to pay a 10% penalty.
However, like traditional IRAs, exceptions to the 10% penalty include distributions for a first home purchase or for higher education expenses.
Learn more: What is an IRA and how does it work?
There are options for Trump accounts, however, without the free $1,000 start-up money from the government. Most notable are 529 accounts, specifically designed for education expenses.
“If you use the 529 money for college, then you get all that growth tax-free. With the Trump account, your growth will never be tax-free,” Brenner said.
States work with investment companies, such as T. Rowe Price, Fidelity and Merrill Lynch, to offer 529 plans to residents.
Coverdell Education Savings Accounts have been around since 1998. They are another education financing vehicle, again without the dollar amount.
“They assume that your contributions are not deductible, but your earnings, if you use the money for education, are tax-free. And ESAs are nice because you can use them for college, and you can also use them for K-12 expenses. So K-12,” Brenner said.
Custodial accounts are another option. Guided by state laws under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), these accounts allow anyone to save and invest money on behalf of a child. The benefits are placed under the control of the beneficiary when he or she is between the ages of 18 and 25 depending on the state.
The account value is considered when the child applies for college financial aid, and there is no limit to the amount that can be contributed, which takes into account gift tax considerations.
Learn more: 10 Best High Yield Savings Accounts for 2025
While 529 plans are the go-to college fund for most parents, ESAs and UTMAs have their place. Still, the government’s initial deposit of $1,000 (or more) might be enough to get parents serious about saving.
“If you have parents participating, you get money from the government, you put $5,000 into the Trump account for 18 years. You know, that’s a good start for a child. If they turn 18, then it becomes a traditional IRA,” Brenner added. “You know, so why not convert your traditional IRA to a Roth IRA? Then you would have years and years of tax-free growth. So in the ideal world, if everything fell into place for someone, that would be a good outcome with a Trump account.”
