One of the more surprising features of the One Big Beautiful Bill Act (OBBBA) of 2025 was the introduction of a new type of retirement account intended to be opened and contributed on behalf of minor children, which the law named the Trump Account (TA). Conceptually, the purpose of Trump Accounts is to give kids a head start on saving for retirement, and so many of the account's aspects mirror those of traditional IRAs; however, there are unique rules for TAs that take effect from birth through age 17.
For instance, TA contributions are generally limited to $5,000 per year (up to $2,500 of which can be from an employer). But certain organizations, including the Federal, state, and local governments and 501(c)(3) charitable organizations, can contribute additional funds (including an initial $1,000 'pilot' contribution by the Federal government for children born in the years 2025 through 2028). And while TA contributions from individuals are made on an after-tax basis, contributions from employers and government and charitable organizations are made pre-tax, giving the TA many of the same characteristics as a traditional IRA with a mix of pre-tax and after-tax funds. So, when funds are eventually withdrawn from the account – which (like IRAs) can only be done penalty-free after age 59 ½ without a specified exception – they're a mix of both tax-free (i.e., from after-tax contributions) and taxable dollars (from pre-tax contributions and investment growth over time).
The caveat, however, is that many of the issues that often make traditional IRAs problematic for their owners – including pre-tax dollars being taxed at ordinary income tax rates on withdrawal, Required Minimum Distributions (RMDs), and the "10-year rule" for most beneficiaries after the death of the account owner – also apply to TAs. And with the potential for TAs to be funded at a very early age and left to compound and grow for 60 years or more, it's possible that they'll eventually create the very same tax headaches in the future that owners of large traditional IRAs are dealing with today.
Thankfully, there are other vehicles available for parents to consider when giving funds to their kids. In addition to 529 plans (which can grow tax-free to be used for qualified higher education expenses), one option that worth exploring is a taxable custodial (e.g., UTMA or UGMA) account. Although taxable accounts don't receive tax-deferred treatment on investment income, that fact could actually turn out to be an advantage because of the "kiddie tax" rules, which allow up to $2,700 of qualified dividends and capital gains to be realized tax-free for dependent children. As a result, a custodial account could have significantly more "basis" than a TA at age 18 and beyond – meaning that the TA will end up generating more taxable income in the future (and be taxed at higher rates on that income due to the ordinary income treatment of gains upon withdrawal)!
One factor that could make TAs more favorable is the ability to convert TA funds to Roth, which could allow a TA owner to pay tax on the funds in their account at relatively low rates early in their career and allow them to grow tax-free thereafter. However, unless the owner has funds available outside of the account to pay the actual tax on the conversion, they'd need to withdraw from the account to pay that tax (and pay tax plus an early withdrawal penalty on that amount as well), significantly reducing the amount that's left in the Roth account to grow tax-free. Which means that even with the ability to convert to Roth, the taxable account could still come out ahead in the end (or at least not be so far behind as to be worth sacrificing the greater flexibility of the taxable account's funds to be used pre-retirement).
The key point is that when it comes to saving for kids, starting to save at an early age is far more important than what type of account those savings go into. While many illustrations of TAs project how their value can grow to eye-popping levels over time, the reality is that similar (or even better) results can be achieved in other types of accounts that have far more flexibility than TAs. And so while TAs can serve as a good conversation starter with parents who are interested in saving for their kids (and it may even be worth opening a TA just to receive the 'free' $1,000 pilot contribution if there's a child who is eligible for it), it may be best to involve other types of accounts in the discussion as well – since they could prove to be an as good or better option for growing a child's savings for the long term!
