President Donald Trump's new child savings program, introduced under the One Big Beautiful Bill Act, has opened a fresh policy debate in Washington as financial advisers warn that the rules surrounding the so-called Trump accounts may be too complex for families to navigate. The initiative, which grants a $1,000 deposit into a new custodial IRA for every American child born between January 1, 2025, and December 31, 2028, is expected to cost the Treasury about $15 billion through 2034. Yet even supporters of the measure acknowledge that the combination of age-based restrictions, contribution limits and tax rules could create challenges for parents hoping to use the program effectively.
The accounts will be available to any eligible newborn with a Social Security number and will operate under a distinct regulatory framework until the child turns 18. Parents, relatives and employers are allowed to make additional deposits, but each source faces its own cap: families may contribute up to $5,000 annually in after-tax dollars, employers up to $2,500 per child, and charitable organisations may add funds only if they do so "on an equal basis to all children in a given geographic area or birth year."
The structure is modeled after retirement accounts, though unlike traditional IRAs, investments inside the Trump accounts must be limited to low-cost mutual funds or ETFs composed solely of U.S. stocks. Expense ratios cannot exceed 0.1%, and the law prohibits investments tied to industry-specific indexes. Financial firms are preparing to administer the new accounts beginning in 2026, with contributions permitted starting in July of that year.
While the $1,000 government-funded seed deposit has drawn early interest, the tax treatment has raised red flags for advisers. Taxes on withdrawals depend on who made the contributions, the purpose of the withdrawal, and the account holder's age. Earnings inside the account accumulate tax-free, but any withdrawal-starting from the child's 18th birthday-is subject to federal taxes on a prorated share of earnings and the initial $1,000 deposit.
Penalties further complicate the landscape. Using the funds for non-qualified purposes such as purchasing a car triggers a 10% penalty in addition to taxes. Withdrawals before age 59½ are also generally penalized unless they fall under exceptions, including higher-education expenses or a first-time home purchase up to $10,000. The formula itself can be confusing: in one example, a family contributing $10,000 of post-tax money alongside the $1,000 government deposit and earning $4,000 in investment gains would find that one-third of any withdrawal is taxable. A $6,000 withdrawal would therefore incur taxes on $2,000, regardless of the recipient's age or reason for accessing the funds.
Despite the potentially intricate rules, advisers say the accounts may offer meaningful long-term value if the child retains the savings past age 18 and converts the balance into a Roth IRA, allowing tax-free growth over decades. But other savings vehicles may appeal more to parents seeking simpler options. Education-focused 529 plans continue to offer broad tax advantages, and custodial Roth IRAs remain attractive for older children with earned income. Some experts also note that a basic custodial brokerage account invested in low- or no-dividend funds could produce stronger after-tax returns because capital gains rates are often lower than ordinary income taxes applied to IRA withdrawals.
