What are the Trump Accounts for kids and how do they work?

Alongside 529 plans and custodial accounts, there is now another way to save for kids: the Trump Account. These investment accounts, introduced as part of the tax and spending bill signed into law this summer, will allow parents and others to contribute up to $5,000 a year on their child's behalf, which will then grow tax-deferred until they turn 18. And for certain kids who meet eligibility requirements, there is an added bonus: a free $1,000 automatically deposited into their account to get it started.

But given the multitude of savings options that already exist for kids, parents may wonder: What sets the Trump Account apart, and is it worth it?

What are Trump Accounts?

The Trump Account is a "special trust designed to give children a head start financially," said NerdWallet. Parents, among others, can contribute up to $5,000 annually until the child turns 18, which is then invested in the stock market — specifically, a "diversified fund that tracks a U.S. stock index," said CNBC Make It. A parent's employer can also contribute up to $2,500 a year to the account, and it will not count as taxable income. But because contributions are made with after-tax dollars, there is no tax deduction.

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Account holders can access the funds once they reach the age of 18. At that point, the "accounts are treated much like a traditional IRA," wherein the "money grows tax-deferred" and "withdrawals are taxed as regular income, plus a 10% penalty if you take the money out before age 59½," said CNBC Make It.

There are some exceptions, though, including penalty-free withdrawals for "higher education expenses, or for those that come as a result of disability, domestic abuse or a natural disaster," said the CNBC Make It. There is also a "$10,000 exception for new home purchases, and $5,000 can go toward a baby of their own."

Who is eligible?

Technically, any parent can open a Trump Account for their child. But only children born after Dec. 31, 2024, and before Jan. 1, 2029, who are U.S. citizens and have a Social Security number, are eligible to receive the one-time government contribution of $1,000.

The accounts are slated to become available "starting on July 4, 2026," by which point the IRS will have also issued its rules for them, providing clarity on how the accounts can be administered, among other details, said U.S. News & World Report. "Generally speaking, parents will open the account through a bank or other financial institution, though others can open your child’s account for you," said Kiplinger.

Is it worth it?

"If your child qualifies for the $1,000 gift from Uncle Sam, you should at a bare minimum open an account to take advantage of it," said Kiplinger. That said, "existing accounts may offer more attractive tax benefits, depending on your goals," said CNBC Make It.

For instance, "brokerage accounts, including UTMA & UGMA custodial accounts, don't have contribution or withdrawal limits," said NerdWallet. And if you are saving for college, a "529 plan offers more flexibility than a Trump Account when it comes to who can open an account and use the money."

One thing worth considering, however, "though the rules aren't settled yet," is the possibility that Trump Account balances "will be convertible to Roth IRAs at age 18, which could result in tax-free savings for the child for life," said Investopedia. If this does end up being the case, the money would "not only grow tax-free, but also come out tax-free," making the Trump Account a "powerful wealth-building tool for young adults."