President Donald Trump recently signed the One Big Beautiful Bill Act into law, opening the door to “Trump accounts” for babies born in the next few years.
The accounts will provide seed money to babies to put toward critical areas later in their lives. Lawmakers have been calling for some form of investment account for newborns for years with mixed results.
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“Trump accounts, as they call it, are a pilot program which will make it possible for countless American children to have a strong start in life at no cost to the American taxpayer,” Trump said at the June announcement of the accounts. “It’s going to have a huge impact.”
Here’s what they are.
What’s a Trump account?
The account is named after Trump, likely reflecting his business background and his ownership of the budget legislation under which it was passed. They were originally called “MAGA Accounts,” which stood for “Money Accounts for Growth and Advancement,” in a nod to the president’s campaign slogan.
The account will provide a starting point of $1,000, free from the government. It acts as a sort of tax-deferred retirement account for children.
Sen. Ted Cruz (R-TX) is credited with including the provision in the bill and called it “transformational.”
“A baby that is born this year that starts with the initial $1,000 seed contribution, over the next 18 years, if $5,000 a year is contributed, at 7% growth, by the time they’re 18, they have $170,000 in this account. By the time they’re 35, they have $700,000 in this account. I believe this will be a transformational policy,” Cruz told CNBC’s Squawk Box in May.
Who is eligible for a Trump account?
Newborns born from Jan. 1, 2025, through Dec. 31, 2028, will be eligible for the account. The child must be a U.S. citizen with a valid Social Security number and have at least one parent with a valid Social Security number.
There are no requirements. Children born before 2025 are not eligible for the $1,000 bonus but are eligible for the accounts themselves.
How do I use it?
It is unclear whether newborns will be automatically enrolled or if parents will have to enroll for them, but the accounts will be effective at the start of 2026.
Parents can contribute up to $5,000 a year, post-tax, to a portfolio that must be put toward a diversified index fund that tracks the U.S. stock index. Employers can contribute up to $2,500 a year to the accounts, and it will not count as income to the worker.
Account holders cannot touch the account until they turn 18, when they are allowed to use the money penalty-free only for higher education expenses, disability, domestic abuse, or natural disaster-related expenses. They may also contribute $10,000 from the accounts to a new home purchase.
If a withdrawal is made before the user is 59 and a half, the money will incur a 10% penalty and be taxed as regular income, with some exceptions.
Are there better options than the Trump account for your children?
Other options, such as a regular Roth IRA, 529 college savings account, or custodial brokerage account, offer their own advantages.
A parent could start a regular Roth IRA for his or her child, investing after-tax dollars into it.
The difference between the Trump account and a regular Roth IRA is that investments in a Roth account are tax-free, while withdrawals of money from the Trump account are not. One can also withdraw from a Roth IRA penalty-free and tax-free, and one’s child may do so once he or she turns 59 and a half.
A 529 is also contributed to after taxes, but withdrawals are tax-free if put toward certain education expenses. College tuition, trade school, and apprenticeship expenses count, as well as up to $10,000 for K-12 tuition and student loan payments.
Financial adviser Amy Spalding told the Washington Post that a 529 is a better option.
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“It’s better from a tax standpoint,” Spalding said. “And there are more investment options. And then there’s a higher contribution limit.”
Lastly, a custodial brokerage account can be opened on a child’s behalf and allows maximum flexibility, as the parent can invest in anything he or she wants, including cryptocurrency, bonds, and regular stocks. The gains from an investment held for more than a year are taxed at the capital gains rate, which is mostly lower than the income rate on the Trump account withdrawals.