Trump Accounts Aren’t Exactly ‘Tax-Free,’ As President Said. Here’s How They Work

During his State of the Union address, President Trump promoted the soon-to-launch Trump accounts as “tax-free investment accounts for every American child.”

“This is something that’s so special, has taken off and gone through the roof,” Trump said during his annual speech to Congress.

However, financial experts say the accounts are not completely tax-free. Created under Trump’s “Big Beautiful Bill,” the accounts will function similarly to a traditional Individual Retirement Account (IRA) once the child turns 18, according to guidance issued in December by the U.S. Department of the Treasury and the IRS.

“The idea that Trump accounts are tax-free isn’t really accurate,” said Ben Henry-Moreland, senior financial planning expert at advisor platform Kitces.com. “People pay taxes on the money they contribute, and they also pay taxes on the investment growth when they withdraw funds.”

The accounts are scheduled to launch on July 4, and most withdrawals won’t be allowed until many years later. Because of that delay, it could take a long time before account holders actually face any tax consequences. Future changes from Congress could also alter the tax rules before withdrawals begin.

White House spokesman Kush Desai defended the president’s statement in an email to CNBC, saying “The accounts will allow every American child to receive a $1,000 initial investment from the federal government, along with possible contributions from philanthropists, which can grow tax-free while inside the account.”

How the Taxes Work

The federal government’s $1,000 starter deposit, as well as donations from philanthropists, goes into the account before taxes are paid. That means those funds will be taxed as regular income when they are withdrawn, according to Treasury guidance.

The same tax treatment applies to:

• Employer matching contributions of up to $2,500 per employee
• Employee salary deferrals of up to $2,500

On the other hand, money contributed by parents, guardians, the child, or others comes from after-tax income—money that has already been taxed. These contributions create what tax experts call a “basis” in the account. As long as families keep track of those deposits, they should not be taxed again when withdrawn.

Regardless of the source of contributions, investment earnings grow tax-deferred, meaning account holders don’t pay taxes while the money remains invested.

However, once funds are withdrawn, the earnings portion is taxed as ordinary income. Because the account may include both pre-tax and after-tax contributions, withdrawals could contain a mix of taxable and non-taxable money.

“These accounts are essentially traditional IRA-style accounts for minors,” said Tommy Lucas, a certified financial planner at Moisand Fitzgerald Tamayo in Orlando, Florida. “With a traditional IRA, taxes are delayed—not permanently eliminated.”

Lucas explained that at some point in adulthood, the child will have to report taxable income when they withdraw funds. Because of that, families will eventually need to plan for the tax bill.

“I’d gladly accept money going into accounts for my kids,” said Marianela Collado, CEO of Tobias Financial Advisors in Plantation, Florida. “But there are other savings vehicles that can offer better tax advantages.”

For example, Collado suggests families might also consider:

• 529 college savings plans
• Brokerage accounts for minors
• Roth IRAs, once a child begins earning income

Potential Growth Of The Accounts

Children born between 2025 and 2028 will qualify for a one-time $1,000 contribution from the Treasury once their account is created. Trump said that with additional savings, the accounts could potentially grow to more than $100,000 by the time the child turns 18.

According to projections on TrumpAccounts.gov, the initial $1,000 deposit could grow to about $6,000 by age 18 if no other contributions are made. That estimate assumes an average annual return of just over 10%, based on the historical performance of the S&P 500.

However, future balances will depend on several factors, including:

• Annual contributions
• Market performance
• Fees charged by custodians or investment funds
• Taxes owed at withdrawal

Lucas calculated that reaching a six-figure balance by age 18 would require parents to contribute about $1,882.81 per year starting at birth, assuming the same high stock-market return.

For some families, saving roughly $150 per month might seem manageable. For others—especially those with multiple children—it may be unrealistic.

 

Source: CNBC