The new Trump Accounts are tax-advantaged accounts that were brought into existence by the One Big Beautiful Bill Act, signed into law in July. Designed to benefit babies born between 2025 and 2028, these accounts commence with a $1,000 deposit and permit up to $5,000 in annual contributions. Parents of children under 17 are eligible to open a Trump Account, though they will not receive the initial $1,000 deposit.
According to a study by Goldman Sachs, continuous contributions from childhood up to 21 years can significantly enhance retirement savings. The study estimates that a contribution of $500 annually from ages 1 to 20 can result in approximately $340,000 extra retirement savings by the age of 65 compared to starting savings at age 21.
While contributions to these accounts grow free of tax, and withdrawals at age 59½ or older are also tax-free, the complexity of these accounts could discourage some families from utilizing them. Still, the attractiveness of generous retirement savings could outweigh the intricacies of managing these accounts.
These accounts, with an annual contribution limit of $5,000, can receive funds from parents, employers, and others. Employers' contributions, capped at $2,500, are tax-deductible. Upon the child turning 18, the account transitions into a traditional IRA, following its tax and withdrawal rules.
The potential for encouraging more individuals to engage with the financial markets is high with Trump Accounts, despite their complexity. Any regulatory guidelines yet to be released are expected to shed more light on how these accounts work. Meanwhile, families can rely on other tax-advantage accounts like 529 savings plans and Roth IRAs, both viable options for tax-free growth. However, for a Roth IRA, the child must have earned income.
The Treasury Department is expected to release implementation details of the $1,000 federal contribution along with instructions for parents on setting up and contributing to Trump Accounts.