The passage of the OBBBA (One Big Beautiful Bill Act) contains a provision for a new type of savings account for children. Set to begin on July 4, 2026, these accounts can be opened for any child under age 18 who has a Social Security Number and who is a U.S. citizen. As part of a pilot program, the Treasury Department would fund $1,000 to any account opened for a child born between January 1, 2025, and December 31, 2028. Termed “Trump Accounts” these new accounts appear to have merit for those eligible for the free $1,000.
However, like most things in life, when something is offered for “free,” strings can often be attached, and these new accounts are no exception. Here’s where it gets interesting. First, on contributions, funds made by the Treasury Department go in pre-tax. Individuals, say the child’s parents, can fund up to $5,000/yr on an after-tax basis, while employers can fund up to $2,500/yr on an after-tax basis. Also permitted to fund at the $2,500, after-tax level are Federal and State government entities and certain tax-exempt organizations (charities). All funds grow tax-deferred as these accounts are loosely built on the IRA chassis. These limits hold until the year the child turns 18. After age 18, normal IRA limits apply to contributions. Any contribution made does not count towards regular IRA limits, and after-tax monies contributed are not considered Roth contributions. Additionally, unlike IRAs and Roth IRAs, there are no income requirements for the child on Trump Accounts.
Distributions add another layer of complexity and confusion. No distributions are permitted prior to the child turning 18. After age 18, normal IRA distribution rules apply inclusive of penalty taxes for distributions before age 59 ½ unless an exception applies. For accounts with both pre-tax and after-tax funds, distributions are processed on a pro-rata basis making a portion of any combined distribution taxable (and a portion of any taken before 59 ½ subject to penalty). Any pre-tax money contributed will be subject to Required Minimum Distributions (RMDs), but not the after-tax money.
With contributions and distributions clear as mud, there are also constraints on the investments. Prior to age 18, the accounts are slated to have a provision where they must be invested in a low-cost mutual funds or exchange traded funds that tracks the S&P 500 index or another index comprised mainly of U.S. companies. After age 18, investment parameters align with those set for IRAs.
Given the nuances of Trump Accounts, and with simplicity clearly missed in their design, time will tell how popular this new savings option will become. However, for those that qualify for the $1,000, that appears to truly be a freebie, so if you have a child that qualifies, check back in 2026. Otherwise, you might just keep life simple and utilize the existing accounts available now. We’re here to help guide you. Let us know how we can help!
