The newly introduced Trump Accounts, tax-favored accounts exclusively designed for children, provide parents with a fresh approach to saving for their children's future. The type of account that best suits your child largely depends on what you aim to achieve; do you wish to invest in your child's college education obtaining tax benefits, or are you aiming for a more flexible account even if it forfeits tax benefits?
To set up a Trump Account for your child, completion of the tax form 4547 is required. Note that eligibility for these accounts is exclusive to babies born between 2025 and 2028, who are privileged to receive a $1,000 one-time federal contribution. These accounts come with an annual contribution limit of $5,000, which is subject to inflation adjustments. Contributions to Trump Accounts grow tax-deferred until withdrawal, and the funds in these accounts are inaccessible until the child reaches 18 years of age. At this point, the account behaves similarly to an IRA, wherein withdrawals are taxed at ordinary income tax rates.
Parents can establish and monitor their child’s Trump Account via the Trump Account app or website. The Treasury Department is working in collaboration with BNY, one of America's oldest banks, alongside Robinhood, a commission-free trading platform, to manage these accounts.
Despite the investment opportunities offered by Trump Accounts, other types of accounts may present more appealing tax benefits. For instance, a 529 savings plan allows investments to grow tax-deferred with typically tax-exempt withdrawals when used for qualified education expenses. Or perhaps a custodial IRA would better suit parents with older children possessing earnings from part-time jobs, offering the children ownership of the account once they turn 18.
If a Roth IRA is selected, your child will pay taxes on their initial contributions but will enjoy tax-free withdrawals at the age of 59½. This is in contrast to a Trump Account where you pay taxes on your withdrawals without receiving a tax break on your contributions.
However, if the priority is greater flexibility with your funds and you accept the absence of tax benefits provided by other accounts, a custodial brokerage account would serve as a viable option. Such accounts do not have contribution limits, and the child can use the money as required once they gain control of the account.