‘Trump Accounts’ for Kids Come With $1,000—and Tax Complications

Politicians wanted to give kids a $1,000 kick-start on investing. The way Congress did it is complicated, but there are some real benefits for families.

The new type of savings accounts for children that made it into the One Big Beautiful Bill Act are custodial individual retirement accounts for kids, with special rules until the year the child turns 18. For the next few years, the Trump accounts come with $1,000 of seed money from the Treasury Department for newborns. That money would grow tax-deferred, with income taxes due upon withdrawal.

---

---

The free $1,000 is certainly a good deal, but it can also make sense for parents to create the accounts even if their children don’t qualify for that money. That’s because employers, state and local governments and charities may also make contributions. 

“We’re going to leave every child with real assets and a shot at financial freedom,” President Trump said at an event in January to promote the accounts. “All Americans will begin their lives with a beautiful nest egg.”

For most families it doesn’t make sense to add their own money. Offerings such as 529 savings plans and even custodial accounts are more flexible and have better tax advantages for parents’ contributions. 

Financial advisers say the best case for adding family money to the accounts could be for wealthy people who have already maxed out 529 savings plans and want to also jump-start their young children’s retirement savings. 

Who is eligible? 

Any child with a Social Security number who is under age 18 at the end of the year the account is established. 

Under a pilot program, the Treasury Department would seed the accounts with $1,000 for children born between Jan. 1, 2025 and Dec. 31, 2028 who have a Social Security number and are U.S. citizens.

When are they available? 

The accounts are expected to roll out in 2026, and parents and others will be able to start contributing in July. The Treasury Department will oversee the program, and banks or other financial institutions will administer accounts.

How do people get an account?

People with eligible children can elect to open an account by filling out a new IRS tax form, Form 4547, which you can attach to your tax return. There is a box to check if you want to receive the $1,000 seed money. Alternatively, in mid-2026 there will be an online portal at www.trumpaccounts.gov where parents and guardians can sign up their children for accounts. 

Another step, including an authentication process, will be needed to activate the account. The accounts will initially be held and created by the Treasury’s designated financial agent and then can be rolled over to accounts held at other companies. 

What are the investment options?

The investments must be in low-cost mutual funds or exchange-traded funds that are made up of mostly U.S. equities. Industry and sector-specific indexes aren’t permitted. The funds are limited to those with an expense ratio of up to 0.1%.

What are the contribution limits?

Beyond the $1,000 federal seed money, others will be able to contribute to the accounts.

Parents, relatives and friends could contribute up to $5,000 annually in after-tax dollars for years before the year the child turns 18. That amount increases annually with inflation. 

They could let employees direct pre-tax salary to accounts for their children, up to the same limit. 

The Trump administration has been urging corporations, the rich and others to contribute to the accounts. JPMorgan Chase, Charles Schwab and IBM are among the companies that have pledged to match the government money for their employees’ children. 

Charities could also contribute. Dell Technologies founder and CEO Michael Dell and his wife Susan said they would donate $6.25 billion to expand the reach of the program and provide $250 for children 10 or younger who were born before Jan. 1, 2025. And the administration is urging wealthy people to donate to children in their home states, an effort that investor Ray Dalio is leading in Connecticut. 

Gregory Leiserson, a senior fellow at the Tax Law Center at NYU Law, said that some companies could use these accounts as a way to curry favor with the administration.

When can the money be taken out, and how is it taxed?

Taxes are where the accounts get really complicated. It depends on who put the money in, how old you are when you take it out, and what you’re using it for. 

You don’t pay taxes on dividends and capital gains that remain in the account.

The beneficiary could empty it and use the money for anything on Jan. 1 of the year he or she turns 18.

Say you just accept the $1,000 and you use it for college. Then you pay federal income taxes on the withdrawal of the $1,000 and any earnings.

Say you use it to buy a car. You’ll also have to pay a 10% penalty.

Just like a regular IRA, there is an early distribution penalty for withdrawals before age 59 ½, unless an exception applies, such as using the money for higher education, or up to $10,000 for a first-time home purchase. 

If you use the money to buy a car after age 59½, you’ll owe income taxes but no penalty. That would mean sitting on the account for decades.

To make matters even more complicated, say you contributed $10,000 of after-tax money to the account on top of the $1,000 seed money, and there is $4,000 of investment earnings. Any distribution you take will be one-third taxable because the $1,000 seed money counts as earnings, and IRA distributions that include after-tax money are partially taxable. If you take out $6,000 in this case, $2,000 would be taxed, no matter what you use it for and at what age.

You can’t cherry pick to take out just the after-tax contributions like you can do with a Roth IRA, said Ian Berger, an IRA analyst with Ed Slott & Co. in Rockville Centre, N.Y.

Contributions from employers and charities have the same tax treatment as the $1,000 seed money.

Should you get a Trump account? 

For parents saving for college, 529 college saving plans offer more substantial tax benefits. For older children, as soon as they start earning income, parents can help them set up a custodial Roth IRA. Contributions to those can come out tax-free anytime and are never subject to penalties.

Even an old-fashioned custodial brokerage account can beat a Trump account if it is invested in a mutual fund with low or no dividends, because the earnings would be taxed as capital gains, not as ordinary income, said Leiserson.

The accounts could make sense for parents who want to get a super early start on their child’s retirement nest egg, said Berger, since they do offer potentially decades of tax-deferred growth. Converting the account into a Roth IRA at age 18 could provide decades of tax-free growth. 

But that is assuming the 18-year-old doesn’t cash out.

This explanatory article may be periodically updated.

Write to Ashlea Ebeling at ashlea.ebeling@wsj.com