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The One, Big, Beautiful Bill Act's passing created "Trump Accounts", a savings plan for those
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Tax Byte
The One, Big, Beautiful Bill Act (OBBBA) introduced sweeping changes to the tax code beyond just making the TCJA provisions permanent. Among the lesser-discussed but potentially significant provisions are the new “Trump Accounts” – a hybrid savings vehicle designed to encourage early investment for America’s children.
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What Are Trump Accounts?
Trump Accounts, §530A, are structured as IRAs for the benefit of individuals exclusively under the age of 18. Think of them as a cross between 529 plans and traditional Individual Retirement Accounts (IRAs), but with their own unique set of rules that create both opportunities and complications.
Critical Effective Dates
July 4, 2026: Trump Accounts launch, and contributions can begin
January 1, 2025 Through December 31, 2028: Pilot program period for the $1,000 federal contribution for eligible newborns
2028 and Beyond: Contribution limits ($5,000 for individuals and $2,500 for employers) begin indexing for inflation
Contribution Rules and Limits
Individual Contributions
Up to $5,000 per year from parents, relatives, guardians, or other taxpayers, but unlike traditional IRAs, these contributions are not tax-deductible.
Employer Contributions
Employers may contribute up to $2,500 per year to Trump Accounts of employees’ dependents (or teenage employees) on a tax-free basis.
External Funding
State and local governments and private charities can also contribute uniform amounts to groups of accounts. Their contributions do not count towards the $5,000 annual limit.
Federal Pilot Program
The federal government will make a one-time $1,000 contribution per child to a Trump Account for U.S. citizens born during 2025-2028. The first $1,000 contribution will be made by the Treasury in 2026. When parents file their 2025 tax returns in early 2026 claiming these children, if no account exists, the Treasury “shall establish an account on the child’s behalf”.
Tax Treatment
Individual Contribution
Individual contributions to a Trump Account are made post-tax. The earnings will be taxed at ordinary income tax rates when money is withdrawn.
Employer and Government Contributions
Contributions made by employers, the original $1,000 contribution made by the federal government, any potential contributions from state and local governments, and contributions from charities act like a traditional IRA. These contributions are tax-free and the withdrawals of those contributions, plus their earnings, are taxed at ordinary income tax rates.
Distribution Rules
Withdrawals from Trump Accounts can begin no earlier than at age 18. The account follows the rules in place for IRAs:
- Withdrawals, net of after-tax contributions, made before age 59½ are subject to regular income tax and a 10% penalty, incorporating the exceptions in §72(t), including for college tuition and for a first-time home purchase (up to $10,000)
- No withdrawals may be made before the year the beneficiary turns 18
Investment Restrictions
Until a child reaches age 18, their Trump Account must be invested in a mutual fund or exchange-traded fund that does not have annual fees or expenses of more than 0.1%. Investments must be made in mutual funds or exchange-traded funds with a ban on industry or sector-specific indexes.
Employer Considerations
For business clients, this creates a new employee benefit opportunity with both opportunities and compliance requirements.
Deductibility
Employers can claim a tax deduction for such contributions as a business expense. This is a benefit that’s deductible to the employer and tax-free to the employee at the time of the employer’s contribution.
Required Plan Document
The employer contribution program must be established pursuant to a written plan document and must meet certain tax rules that apply to dependent care assistance programs (DCAPs).
Nondiscrimination Requirements
The program’s eligibility rules, contributions, or benefits cannot discriminate in favor of highly compensated employees or their dependents.
- The Trump Account rules apply nondiscrimination requirements for employer tax-free contributions that are similar to the §129 dependent care FSA rules. This means employers cannot discriminate in favor of highly compensated employees (HCEs), which in 2026 is generally those who earned more than $160,000 in the prior plan year (plus officers and more-than-5% owners)
- The average benefits offered to non-highly compensated employees must be at least 55% of the average benefits offered to highly compensated employees (the 55% average benefits test)
- However, with respect to Trump Account contributions, the nature of the across-the-board employer contribution structure (based on a nondiscriminatory eligibility class) should make meeting this standard easier compared to dependent care FSAs
Outstanding Questions Awaiting IRS Guidance
Many operational details remain unclear and will require Treasury and IRS guidance:
- Whether an employer must wait for an employee to establish an account before making a contribution
- How an employer corrects a nondiscrimination failure
- How contributions are reported on Form W-2
- How the rules apply when an employee has multiple eligible children
- Specific requirements for the written plan document
Tax Practitioner Planning
Start identifying clients who might benefit from employer contributions and those with young children who could take advantage of the federal pilot program. Identify business clients who might want to incentivize their young workforce with this new fringe benefit. The IRS will issue additional guidance on Trump Accounts, so stay tuned for more clarification on administrative details and outstanding compliance questions.