Trump Accounts: Many-Legged Beasts

When Congress passed, and President Trump signed, the budget reconciliation bill H.R. 1 (commonly referred to as the “One Big Beautiful Bill Act”), they established a new investment vehicle: Trump Accounts. Though frequently thought about only in connection with their most widely-publicized component – a $1,000 pilot contribution by the federal government – Trump Accounts are many-legged beasts. To take advantage of the “free money” pilot contribution from the government and the jump start it can provide to a child’s savings, it is crucial to become familiar with Trump Accounts’ many legs and pitfalls.

First Leg: Establishing the Account

Section 530A of the Internal Revenue Code (the “Code”) allows an authorized individual – a parent, legal guardian, adult sibling, or grandparent – to file IRS Form 4547. The Form serves as an election to establish a Trump Account for a qualified individual. In order to qualify, the individual must not have attained age 18 by the end of the calendar year in which the election is made and must have a Social Security number issued before the date of the election.

Second Leg: the Free Money

To receive the $1,000 contribution, the child must be a United States citizen born after December 31, 2024 and before January 1, 2029, and have a Social Security number issued before the date of the election. The election must be made by December 31 of the calendar year in which the child reaches age 17. It appears that the election to establish a Trump Account and the election to receive the pilot program contribution may be made at the same time.

Third Leg: Contribution Rules

Individuals, employers, and government and charitable entities can all contribute to an Account. Under Section 128 of the Code, an employer may contribute a total of $2,500 per year per employee, pre-tax. An individual, such as a parent or grandparent, may contribute up to $5,000 pre-tax per year to an account. The annual limit on what a Trump Account may receive from individuals and employer contributions is $5,000. Contributions made by government or charitable entities do not count against the annual limit.

Contributions made by individuals are gifts to the beneficiary of the Account. There is an unresolved question about whether the gifts will be considered “present interest” gifts that qualify for the annual exclusion.

Fourth Leg: Control (or Lack Thereof)

The Account is considered owned by the child, and the banking institution where the Account is housed controls it until the beneficiary turns 18. No distributions are permitted in the “growth period” before the beneficiary turns 18. There is a limited exception to this moratorium on distributions if the beneficiary has a disability, in which case the Account may rolled over into an ABLE Account in the year the beneficiary turns 17.

When the beneficiary turns 18, the Account becomes an IRA for the beneficiary’s benefit and under the beneficiary’s control. At that point, the beneficiary may take distributions (with associated income tax liability and possible penalties).

Fifth Leg: Income Taxes

Upon distribution from the Account, almost all of the funds will be subject to income tax. The only funds that will not be taxed are those pre-tax funds that family members gave to the Account. All other contributions – employer contributions, the $1,000 pilot contribution, any other contribution, and all the growth — will be taxed to the beneficiary.

Sixth Leg: Penalties

Because Trump Accounts are IRAs after the growth period, any distributions, with very limited exceptions, made before the beneficiary turns 59 ½ incur a penalty in addition to the income tax liability.

The Takeaway:

If you have a child or grandchild who will qualify for the $1,000 pilot program contribution, you may wish to consider taking advantage of that “free” money. The many other legs of the Trump Account require careful consideration about control, tax liability, and administrative hurdles, and there are other savings strategies that may provide greater benefits. While you can file an election to establish a Trump Account now, contributions cannot begin until July 4, 2026. Lindabury’s estate planners can assist you in your analysis of whether a Trump Account is a beneficial savings vehicle for members of your family.