New Tax-Advantaged Accounts for Kids

It’s never too early to start saving for retirement. And soon, millions of Americans will be able to do so for their children via “Trump Accounts,” a new type of account recently created by Congress. What’s more, accounts for children born in 2025 through 2028 (who are U.S. citizens and have a Social Security number) will receive a $1,000 head start courtesy of the federal government.

Even a small investment may give a child a big head start, thanks to the power of compound growth. Knowing how these accounts work can help you decide whether they might be a good fit for your family.

What are Trump Accounts?

The legislation commonly referred to as the One Big Beautiful Bill Act (OBBBA)¹ has a provision that creates Trump Accounts. If you’re familiar with how a traditional (non-Roth) Individual Retirement Account (IRA) works, you’ll find that Trump Accounts have many similar characteristics. There are a handful of key differences, however:

• Your child doesn’t have to earn income before the account can receive contributions.
• Trump Accounts offer much more limited investment options than traditional IRAs.
• Trump Accounts have different contribution limits and different rules governing who can contribute to them.
• No withdrawals are allowed until January 1 of the year in which your child reaches age 18.

Because the legislation establishing these accounts is so new, the Treasury Department needs to work out many of the details about exactly how they will work. Here’s what we know so far.

Who can contribute to a Trump Account?

With a traditional IRA, you typically make contributions on your own behalf. Since Trump Accounts are set up to benefit children, they have unique rules about who can make contributions and how much they can contribute in a given year. The law currently defines four types of potential contributors:

1. The child, parents, grandparents or other individuals can contribute up to $5,000 per year. The limit will be adjusted for inflation starting in 2028, similar to contribution limits on traditional IRAs.
2. A parent’s employer can also contribute, and up to $2,500 per year of that contribution can be excluded from the employee’s taxable income. That limit also will be adjusted for inflation. An employer’s contribution counts toward the $5,000 annual contribution cap.
3. Governmental entities and nonprofits (like private foundations) can make contributions to what the legislation calls “qualified groups” of children. An example could be all the children in a given school district. There is no limit to the size of these contributions, but all children in the group must receive the same amount. These contributions do not count against the $5,000 contribution cap.
4. The federal government will be making a one-time $1,000 contribution for all qualifying children born in the years 2025 through 2028 as part of a pilot program that might be expanded in the future. These contributions do not count against the $5,000 annual contribution cap.

How can you open these accounts?

You’ll be able to open these accounts directly through the Treasury Department or possibly through banks and other financial institutions. The Treasury Department will provide additional guidance about exactly which financial institutions will be able to offer the accounts.

What investments will you be able to hold in the accounts?

The law restricts investments to diversified funds (such as mutual funds or exchange-traded funds) that track an established equity index, such as the S&P 500. The Treasury Department will need to weigh in on which indices qualify.

When can funds be withdrawn?

No withdrawals are allowed until January 1 of the year in which the child reaches age 18. The accounts appear to convert to traditional IRAs at that point, which would make them subject to normal IRA rules: If your child withdraws money before age 59½, they’ll have to pay any taxes owed (more on that below) as well as a 10 percent penalty. The penalty is waived in certain circumstances, however, including:

• Funds used to pay for higher education.
• Up to $10,000 for the purchase of the account holder’s first home.
• Up to $5,000 per child for qualified birth or adoption expenses.

The IRS provides the complete list of exceptions to the 10 percent early distribution tax.

How are withdrawals taxed?

At least part of each distribution is taxed at ordinary income tax rates. Distributions are pro-rata (divided by a specific ratio) between the nontaxable basis portion (the amount originally contributed that has already been taxed and is not taxed again) and the taxable portion, which includes nonbasis contributions and all earnings. Parents’ contributions come out of after-tax dollars and create basis, so that portion of a distribution is not taxable. The nonbasis portion of each distribution—including contributions from employers, nonprofits and governments, and investment growth—is subject to ordinary income tax.

Are Trump Accounts right for your family?

Trump Accounts offer an additional option for parents who want to help their children build long-term savings, alongside 529 accounts and custodial accounts.

You have time to decide whether they’re right for you. The rules governing these accounts are still being developed, and you won’t be able to start making contributions to them until July 4, 2026. Stay in touch with your financial advisor as the details unfold, and together you can figure out if Trump Accounts might fit into your broader financial plan.

Tax disclosure:

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.