The tax cuts for working families bill established Trump accounts, which are essentially IRAs for children. While contributions can’t be made until July 4, 2026, parents are taking note of a new savings option: funded with $1,000 from the government.
And with tech billionaires Michael and Susan Dell offering to contribute another $6 billion to 25 million savings accounts, people may be asking, “What is a Trump account and what’s the catch?”
The “IRA for kids” concept has been around for some time, Sarah Brenner, director of education at Ed Slott and Company, told Yahoo Finance.
“It’s been proposed several times over the years under different names. So it’s not new,” Brenner said. One point of confusion has been that Trump’s accounts are strictly for educational expenses. That is not the case.
“At 18, accounts are available and you can use them for whatever you want. It’s not limited to education or anything else,” he said.
However, there is a problem.
Read more: Trump accounts explained: how they work and who qualifies
There’s really no “versus” here. In many ways, Trump accounts are IRAs, just with specific allowances and restrictions before age 18. A person must have earned income to contribute to an IRA, while Trump accounts have no such 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 “locked up,” Brenner said. Cannot be accessed. There are no exceptions or qualified distributions.
“But then at age 18, these accounts basically become traditional IRAs. When the child turns 18, they can use the money for whatever they want. But there will be some taxes, and there will be a 10% penalty if you are under 59 and a half 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 is 18 but before he or she turns 59 ½, he or she will have to pay a 10% penalty.
However, like traditional IRAs, exceptions to the 10% penalty include distributions for first-time home purchases or for higher education expenses.
Read more: What is an IRA and how does it work?
However, there are options for Trump accounts without the government’s free $1,000 initial capital. Most notable are 529 accounts, designed specifically for educational expenses.
“If you use the 529 money for college, then you’ll get all that growth tax-free. With the Trump account, your growth will never be tax-free,” Brenner said.
States work with investment firms, 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 educational financing vehicle, again without the big boys.
“They work under the premise that your contributions are not deductible, but your earnings, if you use the money for education, are tax-free. And ESAs are interesting because you can use them for college and also for elementary and high school expenses. So, kindergarten through 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. Income is placed under the beneficiary’s control when he or she is between 18 and 25 years old, depending on the state.
The value of the account is considered when the child applies for financial aid at a college, and there are no limits on how much can be contributed, allowing for gift tax considerations.
Read more: Top 10 High-Yield Savings Accounts for 2025
While 529 plans are the go-to college fund for most parents, ESAs and UTMAs have their place. However, the initial deposit of $1,000 (or more) from the government may be enough for parents to start saving seriously.
“If you have parents who are on board, you get the money from the government, you make $5,000 contributions to the Trump account for 18 years. You know, that’s a good start for a kid. They turn 18 and then it converts to a traditional IRA,” Brenner added. “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.”