Take the Thousand, Skip the Rest

Every American child born between 2025 and 2028 gets $1,000 from the federal government.

The money lands in a brand-new account created by last year's tax law: the Trump account. And as of this month, families can finally add their own money too, up to $5,000 per year.

The $1,000 is exactly what it looks like. Free money. Claim it.

The $5,000 is where careful families are about to make an expensive mistake.

The Deal

Every child under 18 with a Social Security number can have a Trump account. The rules are strict by design:

• The money must sit in low-cost index funds tracking U.S. stocks, with fees no higher than 0.10%.
• Nothing comes out until January 1 of the year the child turns 18.
• Family and friends can contribute a combined $5,000 per year, with after-tax dollars, no deduction.
• Employers can add up to $2,500 per year tax-free, counted inside the same $5,000 limit.

At 18, the training wheels come off and the account becomes a traditional IRA in the child's name, the pay-taxes-later retirement account.

That last sentence is the whole problem.

The Catch

Every account is a deal with the IRS: pay taxes now, or pay taxes later.

• A Roth IRA takes taxed money, and withdrawals come out tax-free.*
• A 529, the education account, takes taxed money, and withdrawals are tax-free when they pay for school.
• A 401(k) takes pre-tax money, and withdrawals are taxed as income.*
• A brokerage account takes taxed money, and gains come out at capital gains rates, 15% for most families.
• A Trump account takes taxed money, and gains come out as ordinary income.*

No other account offers the worse half of both deals. You skip the deduction on the way in, then skip the capital gains rates on the way out.

And the lock is longer than it looks. When the account turns into a traditional IRA at 18, the IRA clock comes with it. Touch the gains before age 59½ and there's a 10% penalty on top of the income tax. Stack that onto a top 37% bracket and an early withdrawal costs roughly 47% of the gains — nearly half, gone just to reach the money early.

There's no pulling "just your contributions" back out, either. Every withdrawal comes out as a blend, part already-taxed contributions and part gains. To keep from paying tax twice on the contributions, your child has to file IRS Form 8606, the running ledger of how much after-tax money is in the account, and update it every year they add or withdraw a dollar, for decades.

The Math

Say you contribute the full $5,000 every year from birth, earning 7%. By 18 the account holds about $170,000: $90,000 you put in, $80,000 of gains.

Now your child spends it. What the IRS takes depends on the account it sits in, and on what the money is for:

Start with the best case: college. Same savings, same market, same tuition bill. The 529 keeps everything. The Trump account hands over $17,600, and that's with a modest 22% bracket and no penalty, since education is one of the IRA exceptions.

Now the other case: anything else. A car, a wedding, a first business. The 10% penalty stacks on top of the income tax, and the Trump account gives up $25,600. The 529 gets punished for leaving the education lane too. The brokerage is the only account that doesn't care what the money is for.

Look at both charts again. The 529 wins the college case. The brokerage wins everything else. The Trump account never wins either one.

The Free Money

None of this means turning the account down.

The $1,000 seed is money your child would never otherwise have. Left alone at 7%, it grows to about $3,400 by 18, and the tax treatment can't sting on dollars that were never yours.

Employer contributions are the same story, only better. Up to $2,500 per year, excluded from your taxable income entirely. That's a raise with a delivery date. If your company offers it, take every dollar.

What's your next move?

If your child was born in 2025 or later, claim the $1,000. The window stays open until they turn 18. Free money shouldn't wait.

If your employer contributes, max it.

Then put your own $5,000 somewhere with a better deal: a 529 for education, a Roth IRA the moment your child has earned income, a plain brokerage account for everything else.

The Trump account is a fine place to receive money.

It's a poor place to put yours.