Trump's New $1,000 Account for Newborns Comes With Rules So Complicated Even Advisers Are Worried

US President Donald Trump's One Big Beautiful Bill Act introduces a new type of custodial individual retirement account (IRA) for children. The initiative promises to deposit $1,000 (£755) into these Trump accounts for American children born between 1 January 2025 and 31 December 2028. These accounts are designed to grow tax-deferred until withdrawal, offering a potential head start for early retirement savings.

Eligibility and Contribution Limits

Any child with a Social Security number born within the specified window is eligible for these accounts, which will have specific rules until the age of 18. The programme is projected to cost the Treasury around $15 billion (£11.3 billion) through 2034.

Parents and relatives can contribute up to $5,000 (£3,775) annually in after-tax dollars until the child turns 18. Employers may contribute up to $2,500 (£1,887) per child. Charitable organisations could also make contributions, provided they are made on an equal basis to all children in a given geographic area or birth year.

Investment Options and Timeline

Investments within Trump accounts must be limited to low-cost mutual funds or ETFs comprising US stocks, with an expense ratio of no more than 0.1%. The funds cannot track industry-specific indexes.

The rollout of these accounts is expected in 2026. Starting in July, parents and relatives will be able to make contributions, with the accounts to be managed by banking institutions

Taxation and Penalties

Financial advisers warn that the tax rules surrounding these accounts add considerable complexity. Taxes are determined based on who makes the contributions, the age at withdrawal, and how the funds are used.

Account holders can withdraw money starting from their 18th birthday for any purpose, with taxes owed on earnings and the initial $1,000 seed money. While capital gains within the account are tax-free, withdrawals are subject to federal taxes.

Any use of the funds for purposes like buying a car will attract a 10% penalty on top of taxes. Premature withdrawals before age 59½ typically incur penalties unless exceptions apply—such as funding higher education or a first-time home purchase (up to $10,000/£7,551).

For example, if you contributed $10,000 of post-tax money plus the $1,000 from the Treasury, and your investment earnings are $4,000 (£3,020), then one-third of withdrawals would be taxable. With a $6,000 (£4,531) withdrawal, $2,000 (£1,510) would be taxed, regardless of the purpose or age.

Are Trump Accounts Worth Considering?

While the initial $1,000 bonus offers an appealing start, the real benefit depends on whether the child retains the account past age 18 and converts it into a Roth IRA. This conversion would allow tax-free growth until retirement.

Advisers also recommend exploring other options, such as 529 college savings plans, which offer substantial tax benefits. For older children, custodial Roth IRAs are an alternative, with tax-free withdrawals and no penalties.

Some experts suggest that a traditional custodial brokerage account invested in low- or no-dividend mutual funds could outperform a Trump account, as earnings taxed as capital gains often result in a lower tax rate than ordinary income.

In summary, the Trump custodial accounts present an innovative but complex way for parents and relatives to start saving early for a child's future. However, understanding the rules around contributions, investments, and taxes is crucial to maximise their potential benefits. While the initial $1,000 deposit is attractive, prudent planning and exploring alternative savings options remain vital for long-term wealth growth.

Disclaimer: Our digital media content is for informational purposes only and not investment advice. Please conduct your own analysis or seek professional advice before investing. Remember, investments are subject to market risks and past performance doesn't indicate future returns.