'Free money' from Trump accounts is a 'no-brainer,' says expert—but other options may be better

CNBC

08-07-2025

Some young American families will soon be getting a gift from Uncle Sam.
The sweeping budget bill that President Donald Trump signed into law on Friday included a provision for the creation of investment accounts that parents can open on behalf of children under 18. And for U.S. citizens born from 2025 through 2028, the government will seed the accounts with an initial contribution of $1,000.
Republican lawmakers have nicknamed these vehicles "Trump accounts," but the idea of creating so-called baby bonds has been around for a while. Hillary Clinton brought up the idea during her 2007 campaign, for example, and Democratic Senator Corey Booker proposed legislation offering up to $50,000 for newborns in 2021.
Depending on your goals, these new accounts don't offer some of the tax advantages available through existing accounts, such as 529 accounts for college savers or Roth IRAs for retirement investors. But there's no reason a Trump account shouldn't be part of your portfolio if your child qualifies, says Jaime Eckels, a partner at Plante Moran Financial Advisors.
"Someone is giving me $1,000 for my kid? That's a no-brainer. Who turns away free money?" she says. "From there you'll have to decide what additional savings you'll have for your child."
Here's what she and other financial pros say you should know about Trump Accounts.
Once the government seeds the account, parents can contribute up to $5,000 per year, post-tax, to a portfolio that must be invested in a diversified fund that tracks a U.S. stock index. Employers can contribute to employees' children's accounts as well — up to $2,500 a year, an amount that won't count as income to the worker.
Account holders can't touch the money until they turn 18, after which the accounts are treated much like a traditional IRA. While the money grows tax-deferred, withdrawals are taxed as regular income, plus a 10% penalty if you take the money out before age 59½, with some exceptions.
Money can be taken out penalty-free for higher education expenses, or for those that come as a result of disability, domestic abuse or a natural disaster. There's a $10,000 exception for new home purchases, and $5,000 can go toward a baby of their own.
The accounts' selling point for investors, advocates say, is the opportunity to begin investing early. That was the same message people like Brad Gerstner, founder and CEO of private investing firm Altimeter Capital, promoted while working with lawmakers in recent years on a project called Invest America.
Gerstner, who spoke alongside other CEOS at a White House roundtable in June, basically got what he asked for — a long-term account seeded with $1,000 from the government plus incentives for corporations to contribute more.
"Think of 401(k)s from birth, where corporations like Uber or United will then match those grants to those kids at birth, where parents now who were afraid [or] didn't know how to open up an account can now save 50 bucks a week or 100 bucks every couple of weeks," Gerstner said at the CNBC Delivering Alpha Summit that year. After three decades, "a 30-year-old today would have over $270,000 in their Invest America account."
His example isn't unfeasible. An account with a $1,000 initial deposit and $200 monthly contributions growing at a 7% annual rate over 30 years would yield a balance of about $254,000, according to Make It's compounding interest calculator. Increase the rate of return to 8%, and the balance jumps to about $311,000.
"There's a forced saving component when you put $1,000 into an account. It's not going to make or break most people, but sometimes it gets people interested in saving and investing," says Eckels. "Those things are great."
If you're already in the habit of saving and investing money, however, existing accounts may offer more attractive tax benefits, depending on your goals, experts say.
If you're hoping to set aside cash for your child's education, for instance, a 529 plan is likely the stronger option. Like Trump accounts, these vehicles are funded with after-tax dollars, but withdrawals are exempt from federal taxes (many states offer an income tax break on 529s as well) as long as the money is put toward a qualified education expense.
These include not only college tuition but also trade school and apprenticeship expenses, and up to $10,000 for K-12 tuition and student loan payments.
These accounts are designed to save for education, but you're not totally pigeonholed if you invest in one and your kid's education costs less than you thought. For 529 accounts that have been open at least 15 years, you can roll over up to $35,000 in unused funds to a Roth IRA. You can also change the beneficiary of the account from one child to another.
If you want to use the Trump account to invest for long-term goals, such as retirement, brokerage accounts and Roth IRAs may come with more favorable tax treatment or flexibility.
A so-called custodial brokerage account, which you can open on a child's behalf, allows you to manage the portfolio until they come of age to take it over themselves. These are regular, taxable accounts, so gains on any investment held for more than a year are taxed at the capital gains rate — generally lower than the income rate you'll owe on Trump account withdrawals.
Plus, these accounts allow you to hold virtually any investment, including stocks, bonds and cryptocurrency, as opposed to the U.S. stock index fund you must hold in a Trump account.
Parents of children who have earned income could also consider opening a Roth IRA on the child's behalf. Roths are funded with after-tax dollars as well, but investments held in these accounts grow tax-free. And provided that your child is 59½ when they begin withdrawing from the accounts, they won't owe a dime in tax to the U.S. government on the money.
You can always withdraw up to what you've contributed to a Roth tax- and penalty-free. You can even withdraw earnings, too, without owing anything, for qualified purchases, including up to $10,000 for buying your first home.
Contribution limits may play into your calculus around which accounts to fund as well. Roth IRAs clock in slightly above Trump accounts, with a $7,000 annual maximum for those under age 50. Single filers can contribute up to $19,000 per beneficiary per year to a 529 account without incurring gift tax, while married couples filing jointly can put in $38,000. There's no limit on taxable brokerage accounts.
Still, if you're in the position to take advantage of free money and compounding growth, you have very little to lose, and plenty to gain, with a Trump account, says Eckels.
While other accounts may be more appealing for your particular goals, "Trump accounts can be a great complement," she says.