Explained: What are ‘Trump accounts’? Every new child in America to get government-seeded investment account

What are ‘Trump accounts?

A new federal initiative backed by US Republicans promises to give every eligible newborn in the United States a $1,000 head start toward long-term savings. Commonly referred to as “Trump accounts,” the new savings vehicles are part of a wide-ranging tax and spending law signed on Friday. The accounts are intended for US citizen children born between 2025 and 2028, and they represent one of the most ambitious federal attempts in decades to help families build generational wealth from birth, the Wall Street Journal reported.

Each account will be seeded with a one-time $1,000 contribution from the government, but only if parents opt in by checking a box on their tax return. The accounts function similarly to Individual Retirement Accounts (IRAs), with money growing tax-deferred until it is withdrawn by the beneficiary. Parents, family members, employers, and even nonprofits can contribute up to $5,000 annually to each account, and the funds will be invested in a US stock index.

Money grows over time but comes with restrictions

Supporters of the accounts argue that the benefit of compounding interest over time makes them a valuable long-term tool. If left untouched and invested at a 6 percent return, the $1,000 deposit could grow to nearly $2,854 by the time the child turns 18. However, the money cannot be accessed until the child reaches that age, and even then, withdrawals are taxed as regular income. Those who take money out before the age of 59½ face a 10 percent penalty, unless the funds are used for specific approved purposes. These include paying for college, purchasing a first home (up to $10,000), recovering from a natural disaster, coping with disability or domestic abuse, or covering costs after having a new child (up to $5,000).

529 plans still seen as a better option

Despite the headline-grabbing promise of a government-funded investment account, many financial experts have expressed scepticism. The accounts offer no tax deduction for contributions, and the earnings are taxed at ordinary income rates, not at the more favourable capital gains rate that applies to standard brokerage accounts. This has led some analysts to argue that families would be better off using existing options, particularly 529 plans, which are specifically designed for education savings.

Financial adviser Amy Spalding said she would continue to recommend 529s to her clients, noting that they offer more flexibility, a broader range of investment options, and better tax advantages. In 2025, for example, individuals will be able to contribute up to $19,000 annually to a 529 plan, while married couples can invest up to $38,000. In contrast, Trump accounts are capped at $5,000 per year in contributions and are limited to a single investment type: a stock index tracker.

Opt-in requirement may reduce participation

The accounts are also subject to other limitations. Because parents must opt in during tax filing, many eligible families may not be aware of the opportunity. Filing mistakes come with a penalty of at least $500, which could discourage participation among low-income households or those without access to professional tax guidance. These design flaws, according to critics, may make the accounts more symbolic than practical for many families.

Political appeal, but uncertain impact

Even so, the idea has long had bipartisan appeal. Versions of child investment accounts have been proposed by both Republican and Democratic lawmakers over the years. While the branding has shifted—from “MAGA accounts” to “Trump accounts,” with the final version unnamed in the legislation—the basic goal remains the same: to give children a financial leg up from birth.

One of the bill’s strongest supporters, Republican Representative Blake Moore of Utah, acknowledged that Trump accounts are not tax-optimized for education, unlike 529 plans. Still, he believes their long-term retirement potential makes them valuable, particularly for families who aren’t able to invest elsewhere. Moore, a father of four, said his own children won’t qualify for the $1,000 contribution, but he still plans to open accounts for them.

An experiment in building wealth from birth

Whether the Trump accounts will deliver on their promise is still unclear. The White House has called them an opportunity for a generation of children to experience “the miracle of compounded growth.” But without broader tax advantages, more flexible usage rules, or strong public awareness, some financial professionals caution that the accounts may end up more as a political symbol than a transformative financial tool.