Understanding Trump accounts: Key aspects and challenges

The introduction of Trump accounts in H.R. 1, familiarly known as the One Big Beautiful Bill Act (OBBBA), marks a significant shift in retirement planning and savings opportunities for young individuals. These accounts are designed with unique features and rules that distinguish them from other traditional savings accounts. Below, we delve into the key aspects of Trump accounts, the issues employers should consider, and the outstanding questions that the Treasury Department must address.

Key aspects of Trump accounts

Trump accounts are structured to facilitate a way for individuals, their families, employers, and others to save for, or on behalf of, minors’ retirement. They are essentially “starter” individual retirement accounts (IRAs) for newborns and children under the age of 18. Essential characteristics include:

• Post-tax contributions: Contributions to Trump accounts from parents are made with after-tax income. This means that while there are no immediate tax benefits for the contributions themselves, the earnings on these contributions grow tax-free.
• Trump accounts can be established for children under age 18 by the Treasury Department or through a direct rollover from one Trump account to another Trump account. In other words, the legislation seems to envision that the initial account will be established with the Treasury Department but could be moved to a private provider.
• Age restriction on withdrawals: Withdrawals from Trump accounts are not permitted until the year the account holder reaches the age of 18. This rule ensures that the funds remain untouched and can accumulate over a significant period of time.
• Conversion to traditional IRAs: Once the account holder turns 18, the Trump account automatically converts into a traditional IRA, and would be subject to the rules that apply to traditional IRAs, including taxation of distributions, the penalty tax for early distributions, and rules on allowable investments.
• Trump accounts may be established beginning in 2026, with contributions being made beginning on July 4, 2026.

Government pilot program "seed money"

The government will initiate a pilot program that provides "seed money" for children who are US citizens with Social Security numbers born between 2025 and 2028. This program aims to give every child a financial head start by depositing $1,000 into their Trump accounts at birth.¹ This initial amount is intended to grow over time through investments and additional contributions, as discussed below.

Other allowed contributions

Family contributions

Apart from the initial seed money, parents, guardians, and other family members can make additional contributions to the Trump accounts. These contributions can be made annually or as a one-time deposit. The annual aggregate contribution limit for family members is $5,000 per year.² This limit will be indexed beginning in 2028. These contributions must be made on a post-tax basis and the limit is reduced by any employer contributions made to the account, as discussed below.

Employer contributions

One of the most intriguing aspects of Trump accounts is the provision for employer contributions. Trump accounts will now join other recently introduced benefits that employers can weigh offering to their employees in a world where the competition to attract and retain talent remains fierce. Employers can contribute to Trump accounts on behalf of their employees' children, under specific conditions:

1. Tax treatment for employer contributions: Employer contributions to Trump accounts are treated as tax-deductible expenses for the employer. For the employee, up to $2,500 of the contribution is not considered taxable income to the employee at the time of contribution. The contributions (and earnings) would be taxable to the child upon withdrawal.
2. Employer and family contribution limits: The combined contribution limit for employer and family members’ contributions is $5,000, so any contributions made by the employer will offset the family members’ contributions. Two of the outstanding issues for which the Treasury Department should provide guidance is whether the $2500 is an annual limit or total limit (the statute does not refer to the contribution as an annual limit) and whether, if the employee has more than one eligible child, the $2,500 is an aggregate limit that must be split among different Trump accounts.
3. Non-discrimination testing: Employer contributions will be subject to non-discrimination testing, similar to the rules applied to dependent care accounts. Under those rules, the benefits and eligibility rules may not discriminate in favor of highly compensated employees (HCEs) and average benefits for non-HCEs must be at least 55% of the average benefits provided to HCEs.

Although these accounts represent a potential new benefit for employers to offer to employees, there are issues and outstanding questions that should be considered, including a company’s demographics, interest by employees, how this benefit compares to other benefits already offered, costs, and non-discrimination issues.

Other entities can contribute

Another unique feature of Trump accounts is that states (including political subdivisions), Indian tribal governments, and charitable organizations can contribute to accounts of a “qualified class” of account beneficiaries. Unlike family and employer contributions, the contributions made by these entities are exempt from the $5,000 annual limit. There are, however, certain restrictions, including:

1. All account beneficiaries must be under the age of 18;
2. All account beneficiaries must be under the age of 18 and must reside in one or more states or in a “qualified geographic area” (i.e., any geographic area in which at least 5,000 Trump account beneficiaries reside and that is designated as such by the Treasury Secretary); or
3. All account beneficiaries must be under the age of 18 and who were born in a particular year or years.

Although there is no limit on how much these entities can contribute to Trump accounts, such contributions must be made equally among the Trump accounts of the members of the qualified class. Contributions made by these entities are excluded from the gross income of the account beneficiary until withdrawn.

Allowable investments

Until the Trump account transitions to a traditional IRA at age 18, the account can be invested only into a mutual fund or ETF that tracks the returns of either the S&P 500 or another index that consists of equity investments in primarily U.S. companies and for which regulated futures contracts are traded. The investment may not use leverage and must have an expense ratio of 0.1% (10 basis points) or less. For comparison, the average fee for equity mutual funds stood at 40 bps in 2024, while passive equity ETFs post an average expense of 14 bps.³ The cap on fees puts the onus on the trustee selecting an asset manager partner that can deliver value within a mutual fund or ETF vehicle. Although an eligible investment may not include any industry or sector-specific index, it may include an index that is based on market capitalization.

Distributions

No distributions (except for qualified rollover contributions from another Trump account, rollovers to ABLE accounts, or distributions to correct excess contributions) are allowed before January 1st of the calendar year in which the account beneficiary attains age 18. Distributions may be made after that, similar to a traditional IRA, but would be taxed at ordinary income rates, and potentially subject to the penalty tax that applies before age 59 1/2 (which itself has a number of exceptions), just like other traditional IRAs.

Outstanding issues for the Treasury Department

Despite the clear benefits and structured approach of Trump accounts, several outstanding issues need to be addressed by the Treasury Department to ensure smooth implementation and compliance:

• Clarity on conversion rules: Detailed guidelines are needed on the process of converting Trump accounts to traditional IRAs. This includes specifying the documentation required and the timeline for the conversion.
• Enforcement of age restrictions: Mechanisms must be established to enforce the prohibition on withdrawals before the age of 18. This could involve penalties for premature withdrawals or automated systems to block such transactions.
• Employer contribution tracking: Effective tracking and reporting systems must be put in place to monitor employer contributions and ensure compliance with the set limits. This is in addition to the employer contribution issues discussed above.
• Regulatory adjustments: As the financial landscape evolves, the Treasury Department must remain flexible in adjusting the regulations governing Trump accounts to address new challenges and opportunities.

Powerful potential awaits Treasury guidance

Trump accounts represent a forward-thinking approach to retirement savings, offering unique benefits through post-tax contributions and tax-free growth. The inclusion of employer contributions adds another layer of potential growth, making these accounts an attractive option for young savers. However, the successful implementation of these accounts hinges on the Treasury Department's ability to address and resolve the outstanding issues outlined. With careful regulation and clear guidance, Trump accounts could become a cornerstone of financial security for future generations.