Federal program launches savings vehicle for children

A federal program that launched July 4 and establishes tax-advantaged investment accounts for children is an initiative that could prove to be a good savings tool for youth but comes with risks, said a Springfield financial planner.

The long-term investment accounts for children in the U.S. under 18, dubbed Trump Accounts, were enacted last year as a result of President Donald Trump signing the federal budget reconciliation act, better known as the “One Big Beautiful Bill Act.” For newborns who are U.S. citizens born between Jan. 1, 2025, and Dec. 31, 2028, they are eligible to receive a one-time government deposit of $1,000 per account. Once a parent or legal guardian opens an account, the U.S. Treasury Department transfers the initial investment. Additionally, families, friends and others can collectively add up to $5,000 per year to the account in after-tax dollars, a limit adjusted for inflation after 2027.

David Richards, senior vice president and senior portfolio manager for Commerce Trust, said the accounts act as a new form of a traditional individual retirement account.

“They’re intended to grow tax deferred. There’s a few exceptions to redraw the funds early,” Richards said. “Otherwise, they’re expected to be an IRA and hold the assets until that kid turns 59 and a half or later.”

Limited exceptions to withdraw the money before age 18 include certain rollovers, distribution upon death and for excess contributions, according to the IRS. Once a child reaches 18 years old, standard rules for traditional IRAs apply, and early withdrawals are subject to income taxes and a 10% penalty. Penalty exceptions before age 59 and a half include uses for higher education expenses and to purchase a first home.

Growth projections
For accounts that receive the initial $1,000 Treasury deposit, TrumpAccounts.gov projects growth to $6,000 by age 18, $15,000 by age 27 and $243,000 by age 55, assuming no further contributions. For accounts that receive the $1,000 Treasury deposit and an additional $5,000 annual contribution, the total is estimated to grow to $271,000 by age 18, $742,000 by age 27 and $13 million by age 55.

Those estimates are based on the S&P 500’s historical average rate of return of over 10%.

For those not eligible for the $1,000 from the Treasury Department, there is still the possibility of an account boost, thanks to the Michael & Susan Dell Foundation.

Dell Technologies Chair Michael Dell and his wife, Susan, announced late last year a $6.25 billion pledge to Trump Accounts that will contribute $250 per account for roughly 25 million children under age 10 who were born before Jan. 1, 2025, according to media reports. The children are eligible if they live in a ZIP code where the median income is $150,000 or less.

Time is essential to the potential growth of Trump Accounts, Richards said. The accounts can be managed via the website and app. As of early July, families had signed up more than 6 million children, according to the Treasury Department.

“A lot of the rationale to start these accounts early is to allow for that compound interest when these kids might not have otherwise had that opportunity,” Richards said.

Wells Fargo estimated that roughly $19.5 billion would flow into U.S. equities through Trump Accounts in the second half of this year. While the figure is notable, Richards said the amount “is relatively small in the scheme of all wealth that’s out there.”

“To put it in perspective, that’s about 3% of 401(k) contributions every year,” he said.

Account awareness
Still, Richards isn’t sure if families have taken notice that the owner of the account will be the child upon turning age 18. The parents, for example, will no longer have any say on how those funds are distributed, he said.

“Once they become 18, that minor child, whatever balance has been there, that kid has the authority to liquidate the entire account and pay a 10% penalty on it, along with taxes, and then go do whatever they want to do with it,” Richards said.

As a long-term savings option, Richards recommends parents or guardians also consider a 529 college savings plan. But he said for families that can invest in it, Trump Accounts seems an advisable option.

“If you qualify, you’d be foolish not to open it because you’re getting free money,” he said.

While Trump Accounts isn’t something his clients at Commerce Trust are asking about, Richards does see the new savings program having the potential to educate those who utilize it.

“If the guardians, the parents, can educate the kid, this is a wonderful tool to get started on an IRA,” he said. “Hopefully, part of the intent of these Trump Accounts is financial education. They can get to learn and understand about compound interest. They can maybe contribute their own money, or it runs in conjunction with their 401(k) when they enter the workforce.”