Trump Accounts: A New Savings Tool, Not a Replacement

By Traphagen CPAs and Wealth Advisors

The new Trump Accounts, created by the One Big Beautiful Bill, are generating both excitement and confusion. Initially promoted as transformational for children’s savings, they add a powerful new tool to the financial planning toolbox. However, they do not replace existing vehicles like 529 plans, UTMAs, or custodial Roth IRAs. Instead, they sit alongside them. Here’s what the law actually says — and how to integrate Trump Accounts with strategies already in place.

Key Features of Trump Accounts
A Trump Account can be established for any U.S. child under 18 with a Social Security number, and the law gives the Treasury the authority to establish the account automatically. Contributions are capped at $5,000 per year and are not deductible, but they do create an after-tax basis within the account. Employers can contribute up to $2,500 per year to the account, and these contributions are excluded from the employee’s taxable income (while deductible to the employer). Most experts interpret the law to suggest that employer contributions count against the $5,000 cap. However, this may not have been the drafters’ intention and is expected to be clarified before the July 4, 2026, commencement of contributions.

The law also provides other potential funding sources. For children born between 2025 and 2028, the federal government will make a one-time $1,000 seed contribution if a parent elects it. Governments and §501(c)(3) charities may also contribute to Trump Accounts on behalf of classes of children, and those amounts do not count against the $5,000 annual limit. Before age 18, all assets must be invested in low-cost U.S. equity index funds or ETFs with fees not exceeding 0.10 percent, underscoring the account’s intent as a long-term, growth-oriented vehicle.

Withdrawals and Access
Withdrawals are not permitted before the child turns 18, with the limited exception of trustee-to-trustee rollovers or a one-time rollover to an ABLE account in the year the child turns 17. Once the child reaches 18, the account is treated as a traditional IRA. That means all the familiar rules apply: distributions are generally taxable, and withdrawals before age 59 1/2 face a 10 percent penalty unless one of the standard exceptions applies, such as qualified higher-education expenses, a first-time home purchase of up to $10,000, disability, adoption or birth, certain medical expenses, or limited emergency withdrawals.

One key provision from earlier drafts — a penalty-free withdrawal option to start a business — was removed before the law was finalized.

Tax Treatment
For tax purposes, contributions and growth fall into three categories. After-tax contributions from family members represent basis and can be withdrawn tax-free. Employer, government, and charitable contributions are treated as pre-tax dollars, fully taxable when distributed. Finally, all investment earnings are taxable as ordinary income when distributed. Despite early talking points, there is no capital gains treatment; Trump Accounts are subject to ordinary IRA taxation once the child turns 18.

Roth Conversion Opportunities
Beginning at age 18, Trump Accounts seemingly should be eligible for traditional-to-Roth conversions under §408A. The pro-rata rule would apply: basis converts tax-free, while pre-tax contributions and earnings are included in taxable income. Dependency status does not prevent a Roth conversion. If the child remains a dependent on the parents’ return, the conversion is still allowed, with income reported on the child’s own tax return. The real question is whether the child’s income level makes the conversion tax-efficient, which it often will during college or early working years.

How Trump Accounts Fit With Other Tools
Trump Accounts should not be viewed as substitutes for other child-focused savings strategies, but as complements to them. A custodial Roth IRA remains the first choice when the child has earned income, offering unmatched long-term tax-free growth. A 529 plan continues to be the primary vehicle for education savings, now covering K–12 tuition, graduate and technical schools, and even allowing up to $35,000 to be incrementally rolled into a Roth IRA for the beneficiary, subject to annual Roth contribution limits. UTMAs still play a role when the goal is outright wealth transfer, despite kiddie-tax limitations, because they permit flexible use of assets once the child reaches majority.

Trump Accounts add another dimension. They can be funded even without earned income, may be seeded by the federal government, and could include employer contributions. Although funds are locked until age 18, the account then follows IRA rules, making it especially valuable as a gateway to Roth conversions at a time when the child’s tax bracket is likely to be low.

Planning Strategies
Several strategies should be considered: front-load contributions to maximize compounding, assume employer dollars reduce the $5,000 cap until clarified, and target Roth conversions during low-income years, such as college or gap years. The most effective planning will pair accounts: custodial Roth IRAs for earned income, 529s for education, UTMAs for flexibility, and Trump Accounts for retirement-oriented growth and Roth opportunities.

The Takeaway
Trump Accounts are not a replacement for existing child-focused vehicles. They are an addition. Families, advisors, and accountants should integrate them into a broader strategy, using each tool for its strengths. A thoughtful combination can position children not only for education and early adulthood but also for lifelong tax-advantaged growth.

About Traphagen CPAs & Wealth Advisors
Celebrating over 55 years, Traphagen CPAs & Wealth Advisors is a dynamic leader in its community, providing a full range of comprehensive accounting, tax, and wealth management services. Unlike traditional financial advisory firms, our accounting team specializes in advisory services in tax strategies, financial reporting, assurance, mergers and acquisitions.

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