Understanding the New $1,000 Savings Accounts for Children

A Head Start in Saving—With Strings Attached

The One Big Beautiful Bill introduced new tax advantaged savings accounts for minors, known as Trump Accounts. Beginning in 2026, a government-backed savings initiative will offer eligible children a $1,000 head start on investing—automatically deposited into a special custodial retirement account. While the concept of free money sounds simple enough, the details are more complex.

What Are These New Accounts?

These government-backed accounts are structured as custodial individual retirement accounts (IRAs) with specific rules in place that change once the child turns 18. Under this pilot program, the U.S. Treasury will deposit $1,000 into accounts for children born between January 1, 2025, and December 31, 2028—provided they have a Social Security number and are U.S. citizens. If you are asking if this is real, the answer is yes, and there is no reason to pass on this free government seed money

After the initial setup in 2026, additional contributions from family members and employers are allowed. Although the accounts mimic traditional retirement plans in many ways, their unique rules and restrictions require close attention.

Contribution Limits and Who Can Add Money

Beyond the government’s initial $1,000 deposit, several types of contributors can add funds to these accounts:

Individuals (Parents, Family, Friends):

• They can contribute up to $5,000 annually in after-tax dollars. This limit is indexed for inflation.

Employers

• Companies may contribute up to $2,500 per child for their employees or the employees’ dependents. This cap also adjusts with inflation beginning in 2028.

These contributions can accumulate over time, making the accounts a potentially powerful tool for long-term savings—especially for families looking to supplement already-maxed-out 529 plans.

Investment Options Are Limited—but Purposeful

To ensure simplicity and stability, investment choices within these accounts are restricted. Funds must be allocated to low-cost mutual funds or exchange-traded funds (ETFs) primarily composed of U.S. equities.

• Sector-specific or thematic funds are off-limits.
• Expense ratios are capped at 0.1% to keep costs low.

While these restrictions may seem limiting, they help safeguard the accounts from volatility and excessive fees.

Tax Treatment: The Real Complexity

• While these accounts offer growth potential, navigating the tax treatment is not straightforward.

Tax-Deferred Growth

• Earnings grow tax-deferred, meaning you won’t pay taxes on interest, dividends, or capital gains while the money remains in the account.

Withdrawals at Age 18

The beneficiary can withdraw the funds for any purpose beginning January 1 of the year they turn 18, however:

• For Qualified Uses (e.g., Education): Income taxes are due on both the original $1,000 deposit and any earnings.
• For Non-Qualified Uses (e.g., Buying a Car): Income taxes plus a 10% early withdrawal penalty apply.

Long-Term Withdrawals

• If the money remains untouched until age 59½, the earnings are taxed as ordinary income upon withdrawal.

Contributions Mix Confusion

When personal contributions are added, calculating taxable amounts gets tricky. For example, if an account holds $15,000—comprising $10,000 in personal contributions, $1,000 seed money, and $4,000 in earnings—a $6,000 withdrawal would be partially taxable (approximately one-third of it, in this case), based on IRS rules for mixed-source IRA distributions.

It’s also important to note that you cannot selectively withdraw only your personal contributions, unlike with a Roth IRA.

Should Parents Add Their Own Money?

The $1,000 gift from the government is a clear win. But adding your own money is a different story.

• 529 College Savings Plans continue to be the most flexible and tax-efficient option for education savings.
• Custodial Roth IRAs may offer better benefits once a child starts earning income, especially because contributions may be withdrawn tax- and penalty-free.
• Basic Custodial Brokerage Accounts, when invested smartly, can be more tax-efficient depending on the investment strategy.

That said, these new accounts may appeal to parents looking to build long-term retirement savings for their children, especially if they plan to convert the account into a Roth IRA.

Considerations Moving Forward

These new custodial retirement accounts may offer long-term tax-deferred growth opportunities, but they come with specific rules, contribution limits, and tax considerations that may not suit every family’s financial goals.

LMC monitors these developments closely to provide clients with accurate, up-to-date guidance. As of the date of this writing, these accounts are not yet available. Official guidance from the White House and the IRS will be necessary to finalize details regarding the technical aspects of these accounts and how withdrawals will be taxed. For more information or questions about these accounts or related planning topics, please contact your LMC professional.