How much money parents can invest in their kids is one of the biggest factors in upward mobility. The inability of many families to provide their children a financial leg up has helped drive income inequality in the United States. There is now a partial solution, offered by the last person I’d have expected to address America’s income inequality problem: Donald Trump.
Trump child investment accounts (officially known as 530A IRAs), started accepting contributions as of July 4, and are designed to provide American children a head start on financial security. As part of this initiative, the administration is providing a $1,000 no-strings-attached contribution to the Trump Account of every child born between January 1, 2025 and December 31, 2028.
As with any government initiative, there are potential pitfalls to go along with the good intentions behind these child investment accounts. Understanding how these accounts work and what snags you might encounter can help you make the best decisions for protecting your kid’s financial security. Here’s what you need to know.
How do Trump Accounts work?
These child accounts are set up as investment vehicles that allow families, employers, governments, and charities the opportunity to contribute money toward children’s future financial needs.
Opening an account
Any parent of a child younger than 18 can open one of these accounts for their child. You will need to sign in or create an IRS account, then complete and submit Form 4547 to elect your child. The process should take no more than 10 minutes; you will need an ID.me account, your child’s Social Security number, and their date of birth and address.
There is also a mobile app, available on both the App Store and Google Play, that can streamline the process of opening and funding an account.
Claiming your seed deposit
Babies born between the start of 2025 and the end of 2028 are eligible for a $1,000 seed deposit from the federal government. Additionally, thanks to a charitable contribution from Michael and Susan Dell, children age 10 and younger may be eligible for a $250 seed deposit. Eligibility for the $250 contribution is restricted to the first 25 million youngsters who live in zip codes where the median family income is $150,000 or less. You can check your child’s eligibility here.
To claim that seed deposit, you need to open an account and file Form 4547. That will trigger the Department of the Treasury’s transfer into your child’s account. There is no information available online about how long the process takes, but the official website claims that you can track the progress of the $1,000 seed money via the mobile app.
Contributions and investments
Families can contribute up to $5,000 annually per account until the child reaches age 18. Additionally, employers may contribute up to $2,500 per employee to Trump accounts on an employee’s behalf, and that money is excluded from the employee’s taxable wages. However, the employer’s contribution counts towards the account’s $5,000 annual contribution limit.
Federal, state, and local governments, as well as charities may also contribute to these accounts without paying taxes. These contributions will not count toward the $5,000 annual limit.
The easiest way to contribute to your child’s account is through the mobile app. It allows you to connect your bank account or brokerage account and instantly transfer funds, as well as set up recurring contributions. It’s unclear if there are additional online methods of making contributions.
Investments in one of these accounts are limited to diversified index funds of U.S. stocks (such as the S&P 500). The eligible investments must cap their fees and expenses at 0.1%. Although the information online is not entirely clear, presumably the accounts provide you a list of acceptable investments. The money grows tax-deferred in the account until it is withdrawn.
Withdrawals
The account is in your child’s name, but you have control of it until January 1 of the year your child turns 18. At that point, the account automatically transitions to a traditional IRA with your child as the account owner.
No withdrawals can be made whatsoever until your child reaches age 18. After that point, IRA withdrawal rules apply. Broadly speaking, that means your child will owe a 10% early withdrawal penalty and ordinary income tax on any withdrawals prior to age 59½, other than withdrawals for qualified education expenses or for a down payment on a house.
What I like about these accounts
I’ve written before about my financial paranoia, and government programs aren’t exempt from my hairy eyeball. But there’s much to admire in the launch of these accounts, even if I’m leery about the hyperbolic promises we’re hearing. Specifically, here’s what I like:
- The seed money: If I had invested $1,000 in the S&P 500 in August 2008, set it to reinvest the dividends, and otherwise left it untouched, it would currently be worth $8,082.87. That’s hardly the millions of dollars the president is promising, but it’s equal to the median amount Americans had in their banking accounts for the most recent Federal Reserve’s Survey of Consumer Finances. This $1,000 gift to newborns could make a big difference, even if families can’t afford to contribute anything more between now and age 18.
- The ubiquity: If you type in the search terms “Trump accounts,” “newborn $1,000,” or “Trump free money” (among many others), detailed instructions from the federal government, major banks and brokerages, newspapers of record, financial experts, YouTubers—and even Fast Company—will show up on your favorite search engine. Investing can be an alphabet soup of incomprehensibility if you haven’t been introduced to it, so an account that is available to every single American citizen under 18 offers a special opportunity for investment education that makes this former teacher proud.
Why I have some concerns
The devil is always in the details, and there’s some disconcerting ambiguity about some potentially significant implications.
- The FAFSA effect: The Department of Education hasn’t commented on how these accounts will be treated on the Free Application for Federal Student Aid (FAFSA). If these accounts are treated as a student asset, then it could reduce your child’s need-based eligibility by 20% of the account’s value. We will just have to wait and see how the department treats these accounts.
- The handover to newly minted adults: 18-year-olds may legally be grownups, but they are barely functional. (I’m speaking as a former 18-year-old.) Giving them the keys to a financial account seems like a recipe for disaster and poor decision-making.
- The potential tax headaches: Here in my home state of Wisconsin, the growth on investments in a Trump account is taxable by the state. That’s also true in California, Hawaii, Kentucky, Massachusetts, Pennsylvania, and South Carolina, while several other states are still working out the legislation. Since these are state taxes rather than federal, institutions aren’t required to file 1099 forms—making this the kind of tax season problem that makes accountants cry into pints of Ben & Jerry’s.
What’s giving me the ick about these accounts
Trump accounts could potentially do a lot of good for families. But no government policy ever survived implementation without hiccups, unanticipated consequences, and the revelation of hidden agendas. Here’s what worries me about these accounts:
- The name: This president is historically unpopular. While placing his name on this initiative could theoretically help bolster his image by tying it to a popular government program, it seems more likely that people might avoid taking advantage of the child investment accounts rather than associate themselves with his name.
- The privacy concerns: The entire infrastructure of these accounts is centered on downloading the mobile app, which feels a little off. Traditionally, government programs offer every possible method of communication and processing—up to and including fax machine and carrier pigeon—especially when launching a new initiative. The lack of clarity on other methods of contributing money to the accounts raises my hackles a bit.
- The widening income gap: Although these accounts are available to everyone (except any child who doesn’t have two parents with Social Security numbers), they offer wealthy families another investment opportunity. Though the seed money will be a nice gift to all families, only the rich will have the means to add to it, year after year, to build on the initial investment.
Money for nothing and the app’s for free
The new child investment accounts are a good idea—though like any investment opportunity, they will probably reinforce the very income inequality they are theoretically designed to fight. Creating an account that all American children are eligible to open, with some caveats, means there is more educational content about introductory investing available everywhere. This is an excellent opportunity for Americans to learn more about investing.
Additionally, the $1,000 seed money for every baby born between 2025 and 2028 is a gift that could offer some important future financial security for millions of American families.
But if you are interested in opening a Trump account for your child, take care. The account could affect your child’s state taxes and financial aid eligibility. And you will need to prepare your kid for the responsibility of controlling the account at age 18.
Lastly, be cautious about your privacy and security with the Trump Account mobile app. While there is no specific reason to distrust this app, it still may be worthwhile to use web-based tools for managing your account.
