On October 1, the Treasury opened roughly 60 million investment accounts for American children in a single day. A week later, according to a Treasury benefits counsel speaking at an American Bar Association tax meeting and reported by Bloomberg Tax, about 164,000 of them had been claimed by a parent. That’s under 1%. So if you have a kid, your kid almost certainly has a Trump Account, and you have almost certainly never logged into it.
I think that gap tells you more than the 60 million figure does. Understanding how Trump Accounts work comes down to one idea: the account is an excellent place to collect money other people give your child for free, and a fairly ordinary place to put your own. Once you see why, the question of whether to send Grandma’s holiday check there mostly answers itself.
A Trump Account is a traditional IRA wearing a child’s name tag
Strip away the branding and a Trump Account is a new kind of individual retirement account, created by the 2025 tax law and described on the IRS’s Trump Accounts page as an IRA for eligible children. Any child under 18 with a valid Social Security number qualifies. The money legally belongs to the child, and a parent or guardian manages it until then.
During what the rules call the growth period, the account can only hold low-cost index funds that track mostly American stocks, like the S&P 500. You can’t pick individual stocks, buy bonds, or use borrowed money. Savingforcollege.com reports the fees are capped at 0.1% a year, and that the default fund is State Street’s S&P 500 ETF. Withdrawals are generally blocked until January 1 of the year the child turns 18. After that, the account follows traditional IRA rules, which is where the tax story gets interesting.
Contributions follow a few layers of limits. Family, friends, and the child together can add up to $5,000 a year. Employers can contribute up to $2,500 a year tax-free to the employee, but that counts inside the $5,000. Money from the federal government, state and local governments, and charities sits outside the cap entirely.
The money you didn’t earn is the best part of a Trump Account
Three streams of free money can flow in. Children born from January 1, 2025 through December 31, 2028 who are U.S. citizens can get a one-time $1,000 deposit from the Treasury, but only if a parent elects it using Form 4547, through the Trump Accounts app, or through their IRS account. The account existing isn’t enough. Someone has to ask for the money.
Second, the Michael and Susan Dell Foundation pledged $250 deposits for children 10 and under living in ZIP codes with median family incomes up to $118,000, covering about 25 million kids, according to the CT Mirror’s reporting on the White House’s October figures. Third, employers. The White House says more than 70 companies have signed on to contribute for employees’ children, which means some of you will see a Trump Account line in your 2027 benefits enrollment.
The White House also put numbers on where the money has come from so far: more than $4.5 billion deposited since the July 4 launch, including about $2.6 billion from philanthropy, $1.3 billion from the Treasury, and $638 million from friends and family. Notice the ratio. Families have put in about a seventh of the total. The account is mostly holding other people’s generosity, which is exactly what it’s best at.
Why your own dollar gets worse tax treatment than you’d expect
The tax mechanics are the part most explainers skip. When you put after-tax money into a Trump Account, that money becomes what tax people call basis. You already paid tax on it, so you won’t pay again when it comes out. The growth on top of it is a different story. Under traditional IRA rules, earnings come out taxed as ordinary income, the same rate as a paycheck. And as emergency physician Jim Dahle explains in his White Coat Investor breakdown, any money that arrived without being taxed first (the $1,000 seed, Dell’s $250, employer contributions) has no basis at all. Every dollar of it, plus its growth, is taxable when withdrawn.
Compare that with the two accounts a Trump Account is competing against for a family’s holiday gift money. In a 529 plan, growth comes out completely tax-free when spent on qualified education. In a custodial Roth IRA, contributions can come back out at any time and growth is tax-free in retirement, though the child needs earned income to contribute. A Trump Account sits in between: tax-deferred, then taxed.
Some numbers make this concrete. Say a grandparent puts $5,000 into a newborn’s Trump Account this December, and it earns 7% a year (the same return Fidelity assumed in a hypothetical cited in the CT Mirror’s coverage). After 18 years, $5,000 times 1.07 to the 18th power is about $16,900. The original $5,000 is basis, so $11,900 is taxable growth. If your 18-year-old pulls it out for something that isn’t a listed exception, and they’re in the 12% bracket, that’s about $1,428 in income tax plus a 10% early withdrawal penalty of about $1,190. Roughly $2,600 goes to the IRS. The same $16,900 in a 529, spent on tuition, owes nothing.
Now run the $1,000 seed through the same math. At 7% for 18 years, it grows to about $3,380, and all of it is taxable because none of it was ever taxed going in. At a 12% rate that’s roughly $406 in tax, leaving about $2,974. That’s still close to $3,000 the family never had to save. Taxable free money is still free money.
Paying for college from a Trump Account costs more than paying from a 529
The penalty does go away for qualified higher education expenses, along with a first-home purchase of up to $10,000 and some birth, adoption, and medical costs. But the income tax on the earnings doesn’t. So using a Trump Account for college is like using a 529 that sends a bill at the end.
Financial aid adds another wrinkle. Savingforcollege.com expects Trump Accounts to be treated as student assets on the FAFSA, assessed at 20%, compared with a maximum of 5.64% for parent assets like a parent-owned 529. The Department of Education hasn’t issued guidance yet, so treat that as a likely outcome rather than a rule. If it holds, $16,900 in a Trump Account could reduce aid eligibility by about $3,380 a year, versus about $950 if the same money sat in a parent’s 529.
There’s also the control question. At 18, the money belongs to the child, much like a UTMA custodial account. Savingforcollege.com’s bottom line: Trump Accounts complement 529 plans, they don’t replace them.
Who a Trump Account is really built for
The free-money math and the tax math point in opposite directions, and which one wins depends on the family. For families who would never have opened any investment account for their child, a Trump Account with a $1,000 seed, a $250 Dell deposit, and maybe an employer match is a real asset that didn’t exist two years ago. That’s the population the free money helps most, and it’s also the population least likely to know the account needs claiming. A 0.27% claim rate in the first week suggests the bottleneck isn’t money. It’s paperwork.
For families already funding a 529, the account works best as a container for the free stuff. Claim it, elect the $1,000 if your child qualifies, take any employer contribution, and let it sit. Your own after-tax holiday gifts generally do more good in a 529 or a custodial Roth first. Dahle’s suggestion is to fill those accounts to the level you want and only then send extra dollars to the Trump Account.
That’s how Trump Accounts work in practice: a strong deal on money you didn’t earn, and an average one on money you did. The most valuable step for most parents this month isn’t contributing. It’s opening the app and claiming the account, because the free money doesn’t arrive until someone asks for it.
