A New Federal Savings Option for Children: Key Planning Considerations

The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, created a new type of tax-advantaged savings account for children. Because these accounts are new and guidance is still developing, details may change. With that in mind, below is a general overview of how they work.

Basics

Trump accounts were introduced to encourage long-term savings for children. They operate much like an IRA, though in these accounts the child is not required to have earned income in order to receive contributions.

Most notably, children born between January 1, 2025 and December 31, 2028 are eligible to receive $1,000 in seed funding from the Treasury. If you have an eligible child, you must opt in to receive the seed funding. To do so, you can follow the instructions on trumpaccounts.gov.

At age 18, the beneficiary takes full control of the assets in the account and from that point on, the account is treated similarly to a Traditional IRA.

Contributions

Contributions can come from individuals (i.e. parents and grandparents), employers, charitable organizations, and the government. Contributions from individuals and employers are limited to $5,000 per year in total, with employer contributions capped at $2,500. The $5,000 and $2,500 limits are scheduled to be indexed for inflation after 2027.

Investments

Funds inside the account will be limited to certain eligible investments. While it’s not entirely clear what those options are to this point, guidance issued says that those investments will generally consist of low-cost, U.S. based stock index funds.

Withdrawal Rules

Withdrawals are generally prohibited before the beneficiary is 18 years old. After reaching 18, the account is treated much like an IRA in that taxable distributions are treated as ordinary income. Taxable amounts withdrawn before age 59½ may also be subject to the 10% additional tax unless an exception applies, such as certain qualified higher-education expenses or a qualifying first-time home purchase.

Tax

Contributions from individuals are after-tax (no tax deduction) and create non-taxable basis in the account. Earnings on those contributions grow tax-deferred.

Contributions from employers, charitable organizations, and the government generally do not create after-tax basis for the child, meaning those amounts and related earnings are expected to be taxable when distributed.

This is where things get tricky. If no individual contributions are made to the account, 100% of the balance will be subject to ordinary income tax at withdrawal. However, if individual contributions were made, that contribution basis will need to be tracked as distributions will be taxed proportionately between the non-taxable basis and total account balance.

As an example, say that the account was funded with $1,000 in seed funding from the government and an additional $4,000 from the parents at the start. When the child reaches age 18, the account now has a total balance of $20,000. In this example, 20% of each distribution is tax-free and 80% taxable at ordinary income rates.

$4,000 after-tax contribution basis ÷ $20,000 total account value = 20% non-taxable basis.

In practice, this makes recordkeeping important, especially if parents, grandparents, or others make after-tax contributions over multiple years.

Conclusion

The good:

• For children born between 2025-2028, $1,000 in free money is hard to ignore.
• The availability of employer contributions is unique to minor savings alternatives.
• Lack of an earned income requirement for contributions makes this a great account for retirement specific contributions for minors before they reach working age.

The bad:

• Depending on the goal, the tax treatment when the beneficiary takes over the account may be less favorable than alternatives like a custodial brokerage account, 529 plan, or Roth IRA.
• Limited diversification options outside of U.S. stocks.
• No access to funds until the child reaches 18.

Like most new planning tools, Trump accounts fall somewhere in the middle. They are not a silver bullet but can be a useful tool for parents that want to focus savings specifically towards that child’s retirement.

For families with children born between 2025-2028, the decision is fairly straightforward: it likely makes sense to open the account and capture the $1,000 of seed funding even if you don’t plan on making additional contributions. Free money with tax-deferred growth is a great starting point.

Where the decision requires more thought is how much (if anything) to contribute beyond that initial funding. When compared to alternatives like 529 plans, Roth IRAs (when eligible), or even custodial brokerage accounts, the tradeoffs become more nuanced.

From a planning perspective, these accounts may fit best as:

• A supplemental savings vehicle rather than a primary one.
• A way to jumpstart long-term investments for a child.
• A strategic option when employer or third-party contributions are available.

If you’re considering opening or funding one of these accounts, let your Cambridge advisor know. We are happy to help evaluate how it fits into a broader financial plan.