Trump Accounts for Kids
- Alex Potter, CFP®
- Feb 1
- 4 min read
The One Big Beautiful Bill Act created a new pathway for kids in America to get introduced to investing. Like anything else that is beneficial for children (reading, writing, math, science, sports, etc.), the way to get them excited about a topic is to introduce them to the concept and then actually get involved!
Getting the youth involved with equity markets is a wonderful thing, and hopefully will lead to more financial education and wealth creation for their futures.
So what is the program? How does it work? Why is it important to consider as a parent? What pitfalls are there? Let's dig in...
"The habit of saving is itself an education" - T.T. Munger
The Technicals
The Trump Account needs to be established via IRS Form 4547 or by online registration at https://trumpaccounts.gov/ starting July 4th, 2026.
Children born between January 1st, 2025 - December 31st, 2028 will receive a seed deposit of $1,000 from the US Government.
Children under the age of 18 qualify to open an account.
Parents will be the guardian of the account, but the account does belong to the child, and they will receive ownership when they turn 18.
Max contribution limit of $5,000 per year. Contributions may come from anyone!
Employers may also contribute up to $2,500 per year - this value is INCLUDED in the max of $5,000 per year.
Original Government deposit of $1,000 is NOT included in the $5,000 annual cap for those that qualify.
This annual cap is expected to be indexed to inflation and may increase as years ahead.
Variety of investment options will be available to choose from.
How Does it Work?
The investment program is designed for long term savings. Distributions are not allowed prior to the age of 18 and the money invested will also grow "tax-deferred" which is a tremendous advantage. After the age of 18, distributions are allowed, however the account will be treated like a Traditional IRA. Source
The difference between a normal IRA and the Trump Account is that during the years of saving, contributions are made with AFTER TAX dollars. These contributions will create a cost basis that will be tracked. Any profits/gains made from these contributions will be exposed to tax/penalty depending on when distributions are taken.
Distributions after the age of 59 1/2 will be taxed at ordinary income tax rates, to the extent that you have gains. The cost basis will NOT be taxed.
Distributions before the age of 59 1/2 will have a 10% penalty on the GAINS along with ordinary income taxes.
Option to convert to a ROTH account will be available after the age of 18.
If a conversion is executed, only the GAINS will be taxable as ordinary income in the year the conversation was made.
Benefit of Converting into a ROTH
By converting the Trump Account into a ROTH at the age of 18+, a combination of your cost basis and gains will be within the portfolio. If the individual decides to take a distribution PRIOR to the age of 59 1/2, then the cost basis would come out FIRST which would be tax free. The CONVERTED amount would remain and after the age of 59 1/2, can be distributed TAX FREE.
this provides options for the account holder, and provides many decades of "tax-deferred" investment growth and eventually "tax-free" distributions.
If the account is NOT converted to a ROTH, the account will be treated as an IRA. IRA accounts do not have ordering rules for distributions, therefore any early distributions will be pro-rata between cost basis and gains. The gains would incur a penalty and ordinary income tax would apply.
"Money makes money. And the money that money makes, makes money." - Benjamin Franklin
What are the Pitfalls and Why Should Parents Save?
The biggest pitfall I see is not taking advantage of this program. There are so many benefits to get your child or grandchild involved. Learning how to invest early, to watch your savings grow, and to take ownership should not be underestimated. Let's take a look at some potential outcomes of investing early.
Let's say Amanda and James welcomed into the world their firstborn daughter Emma in 2026. She would receive $1,000 from the US Government and Amanda and James decides to invest into the S&P 500.
Let's take a look at a few scenarios!
Scenario 1:
Just invest the original $1,000 and never invest again, and receive 8% per year in return.
Emma would have just under $4,000 by the time she was 18. Not bad!
Scenario 2:
Receive the $1,000 from the Government, and then save $5,000 per year on January 1st until the year Emma turns 18.
Now Emma will have over $200,000 by the time she is 18! Pretty incredible.
Scenario 3:
Emma's family was able to ave $5,000 per year and then she leaves the account alone until she turns 60. This means Emma invests for 42 years!
Emma now has over $5,700,000 by the time she is 60 years old. This is the power of compounding.
These examples above are hypothetical and for illustrative purposes only. The rates of return do not represent any actual investment and cannot be guaranteed. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Conclusion
By creating a mechanism for families to save for their children, the long term opportunities for wealth creation is astounding. Perhaps for Christmas, birthdays, and other special occasions, family members can now save into the child's account to save for their future in addition to toys and clothes.
For further questions, please feel free to reach out to Foundation Wealth Management. We'd be glad to help and discuss in greater detail.
Fact of the Month
The Rule of 72 (or 72 ÷ interest rate) helps estimate how long it takes for money to double under compounding.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. This communication is strictly intended for individuals residing in the states of MI, IN, OH. Cambridge and Foundation Wealth Management are not affiliated.
