The One Big Beautiful Bill Act (OBBBA) created a new tax-advantaged savings vehicle for children known as a Trump Account (TA). These accounts cannot be established and funded until after July 4, 2026, and clarification on certain details is still needed (more below), so questions remain regarding whether these new accounts improve on strategies families already have at their disposal. As TAs prepare to roll out, we break down how they work, how they’re taxed, and how they may or may not fit into your family’s long-term financial goals.
The Details
All children under age 18 with a Social Security number are eligible to open a TA, and children born between 2025 and 2028 can receive a one-time contribution from the federal government of $1,000. To establish the account, you’ll need to file Form 4547 via an online IRS portal which is expected to launch later this year (you may have also noticed this form was available to file along with your 2025 federal tax return).
Beginning July 4, parents, grandparents, or other individuals may contribute up to a combined $5,000 per year per child (the $1,000 government contribution does not count towards this limit). The annual contribution limit will be indexed for inflation starting in 2028 and contributions can continue through the year in which the child turns 18.
Employers, state and local governments, tribal governments and certain nonprofit organizations may also contribute under rules that are still being developed by the IRS.
Until the year the child turns 18, TAs can only invest in mutual funds or ETFs that track a qualified U.S.-based index, do not use leverage, charge fees no higher than 0.10% and “meet additional IRS criteria.” Therefore, in effect TAs will be limited to using passive index funds.
In the year the child turns 18, the TA automatically converts into a Traditional IRA and becomes subject to normal IRA rules. That means that additional contributions would require earned income, withdrawals will be taxed as ordinary income and penalties may apply for distributions prior to age 59 ½. Therefore, whatever tax advantages existed during the early years ultimately funnel into the Traditional IRA system, which should shape any discussion about whether TAs for your children make sense within the broader context of your planning goals.
The Long-Term Compounding Story
Let’s assume you establish a TA for your child born this year. In addition to the $1,000 initial government contribution, you fund $5,000 annual contributions (with 2.5% annual inflation adjustments) for 17 years, and the account earns 6% on average per year.
Under these assumptions, the account could reach nearly $200,000 by age 18 (with about $112,000 in contributions). If no additional contributions were made and the funds stayed invested at the same return until age 65, the balance could grow to approximately $3.26 million. However, inflation matters. At a long-term inflation rate of 2.5% per year, that $3.26 million would have purchasing power closer to $650,000 in today’s dollars.
So, there are two main takeaways: 1) starting early meaningfully increases the impact of compounding, and 2) inflation steadily erodes future purchasing power, which is why saving needs to continue well beyond childhood. But compounding alone doesn’t determine whether this is the most efficient strategy. Tax structure matters just as much as growth.
The Tax Question: Ordinary Income vs. Capital Gains
Both while the child is a minor and after they reach age 18 and the account converts to a Traditional IRA, investment growth is tax deferred. Withdrawals from Traditional IRAs are taxed as ordinary income, not long-term capital gains. Therefore, if we return to the projection above and assume the $3.26 million is withdrawn at age 65, the after-tax value could fall to a range of roughly $1.95 million to $2.10 million (assuming a combined federal and state marginal tax rate of 35% to 40%).
Alternatively, had the contributions been invested in a taxable brokerage account rather than a TA, most of the gain would qualify for long-term capital gain tax treatment. At a combined tax rate of 23% to 25%, the after-tax value could remain closer to a range of $2.40 million to $2.50 million.
This is a simplified comparison which doesn’t take all variables into account, but it highlights a key structural question: does converting potential capital gain income into future ordinary income improve the ultimate outcome? For many households, particularly those in the higher income brackets, the answer is likely no.
Tax rates are only part of the equation, however. Funds in taxable brokerage accounts can be accessed at any time, without the early distribution penalties that come with retirement accounts. That flexibility can matter over a multi-decade horizon, especially since life rarely follows a clean timeline. Young adults may need capital to purchase a home, start a business, or cover early-career expenses. Traditional IRAs generally impose a 10% early withdrawal penalty on top of ordinary income taxes before age 59 ½, whereas assets in taxable or custodial structures can be deployed whenever the need arises. For this and other reasons, the decision to fund a Trump Account shouldn’t be evaluated in isolation. It should be weighed against the vehicles that families already use: UTMA accounts, 529 plans, and trust-based gifting strategies. Each of these, of course, have their own trade-offs among tax efficiency, control, and flexibility.
The Potential Impact of Roth Conversions
Once the account becomes a Traditional IRA at age 18, one potential strategy is to convert some or all the balance to a Roth IRA during years when the beneficiary’s income is relatively low. If done in a low tax bracket, the conversion tax could be minimal, and the funds would then grow tax-free for life.
There are complications, however. Income for minors and dependent students may be taxed at their parents’ marginal rate under the “kiddie tax” rules which limits conversion flexibility before the child is fully tax-independent. For many young adults, the most attractive Roth conversion window may be relatively narrow: after they’re financially independent but before their income rises substantially.
It remains unclear how the IRS will treat Roth conversions from former Trump Accounts, and additional guidance is expected. If conversions are clearly permitted, the long-term case for Trump Accounts improves meaningfully, but until then, this planning opportunity remains somewhat theoretical.
Other Considerations
If your primary goal for setting aside money for your children is for them to use the funds for higher education expenses, then funding a 529 plan is usually more efficient due to tax-free growth (when used for qualified expenses), widespread access to state income tax deductions and the ability to roll unused balances to a Roth IRA (with limits).
Another major issue that remains unresolved is how contributions to TAs will be treated for federal gift and generation-skipping transfer tax purposes. The statute that created TAs does not clearly state that contributions qualify for the annual gift tax exclusion that is typically used when funding other pre-existing vehicles like 529s and custodial accounts. Without clarification, contributions could technically be treated as gifts of a future interest rather than a present interest, which could mean that contributions would not qualify for the annual gift tax exclusion and donors would need to file a federal gift tax return. While this wouldn’t likely create an actual tax liability for most families, this introduces administrative complexity that doesn’t exist with other planning tools.
Conclusion
Trump Accounts purportedly are attempting to encourage retirement savings before adulthood, but whether they represent a meaningful planning improvement is less clear. For many families, existing tools already accomplish similar goals with simpler tax treatment. With that said, the structure is still new and additional IRS guidance may clarify planning opportunities, particularly around Roth conversions.
As with most planning questions, the “right answer” will likely depend on how the account fits within your overall financial strategy.
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