The truth about Trump Accounts
- Constantine J Kitrinos, CPFA
- 5 days ago
- 7 min read
Updated: 4 days ago
Trump Accounts, Brilliant Wealth Hack or Tax Trap?
Let’s talk about the "Trump Accounts" we've been hearing about online, on TV, and from friends. Hopefully, after reading this blog, you'll have a better understanding of whether your kids actually need one or not.
I decided to write about these accounts because it seems like lately, my inbox has been flooded with questions about the newly legislated American Opportunity Accounts—what the media has been calling the “Trump Accounts.” Heck, even the website itself features a URL naming them "Trump Accounts". You’ve probably seen the headlines promising "free seed money" for your kids and painting these accounts as an absolute must-have for every family. Who wouldn't love free money for their kids?!
But as we know, when it comes to wealth management, one size rarely fits all. Everything is so specific to the person, it's laughable to broadcast a strategy that's for everyone. Let's go over what you heard about them, what you think you know, and the way things actually work. Here is exactly what these accounts are, who gets the "free money," and whether this makes sense for your family’s financial game plan.
What Are These Accounts, Anyway?
At their core, the American Opportunity Accounts are a new tax-advantaged way to build foundational wealth for kids. The key is how tax-advantaged are they for you and your situation? You can put in up to $5,000 a year of after-tax money, it gets invested in broad U.S. market indexes (like the S&P 500), and it grows tax-deferred. That part is somewhat straightforward, but perhaps not enough "umf" to get you running to the website to start the online application.
The catch? The guardrails. Unlike a traditional UTMA custodial account, where your kid gets unrestricted access to the cash at age 18 or 21 here in New York (hello, new sports car), these funds are locked down. After age 18, the money can only be pulled out penalty-free for specific, approved adulting moves: paying for education, buying a first home, starting a business, or rolling it into a retirement account. Pull it out for a vacation or a new iPhone? You get hit with a 10% penalty. Depending on how you look at things, this could either be perceived as a benefit or perhaps a deterrent from wanting to use this account type.
Where’s the "Free Money"?
This is where the media hype gets a little ahead of reality. The seed money is highly specific:
The $1,000 Government Seed: This is a pilot program strictly for kids born between January 1, 2025, and December 31, 2028. If your kids are older, they are entirely excluded from this federal cash. Sorry, kids, you were born in the wrong year!
The $250 Dell Match: Michael and Susan Dell pledged private money to fill the gap for kids 10 and under (born before 2025). So your kids might not qualify for $1,000 from the government, but they might qualify for something else. But here is the trick—eligibility is based on the median income of your ZIP code, not your actual tax return. Does that leave you scratching your head? It's not so clear how you'll qualify until you find the median income reporting. Your child might qualify for this $250 based on where your house is located.
The True Hidden Gem (For W-2 Employees)
If your kids don't qualify for the seed money, there is one massive feature you should be paying attention to—especially if you are a W-2 employee at a mid-to-large company.
Starting in July 2026, employers can contribute up to $2,500 annually, as a tax-deductible contribution, directly into the accounts of their employees' children. You did see that correctly; those contributions come off of your taxable income. It's a huge advantage for this money not to count toward your taxable income. Business owners, remember, because of strict IRS rules, executives can't hoard this perk; companies have to offer it to all eligible employees. For those business owners I work with, you may consider this benefit for you and your staff as an enhancement. If you or your corporate HR department rolls this out as a fringe benefit, it is essentially the holy grail of free money for your kids. What a powerful component that nobody is talking about!
The W-2 Advantage: Why You MIGHT Want One
If you are a W-2 professional and your kids don't have legitimate earned income (meaning they can't open a Roth IRA), this account is a fantastic tool. Although I reference the Roth IRA, remember, this account grows tax-deferred and will be taxed at some point, as opposed to a Roth, which will not if used correctly.
Normally, if you aggressively fund a traditional custodial account (UTMA) for your child, you eventually hit the dreaded "Kiddie Tax." It will happen to you, too; trust me! Once the account's dividends and unearned income cross $2,700 a year, the IRS taxes the excess at your highest tax bracket.
These new accounts completely bypass that. They grow tax-deferred, shielding that compounding growth from the Kiddie Tax year after year. The part that gets parents enraged is when they change the child's investments or trim some gains from a stock, and it triggers the Kiddie Tax even though they didn't take any money out. Plus, you get those 18-year-old behavioral guardrails, so you know the money is going toward a house or a business, not a spring break trip. Again, some look at that as an advantage to prevent their kids from making poor choices with their money, and others might think it's more red tape, placing restrictions on the funds in their child's account.
The Business Owner Reality: Why You Might SKIP It
If you are an entrepreneur or a business owner already executing high-level tax planning, these new accounts might actually be a step backward for you. I like to point this out because candidly, I had some reservations about the true benefits when the program details began to roll out.
Here is the flaw: When the money is eventually withdrawn for a house or a business, the principal comes out tax-free, but the gains are taxed as ordinary income. Why is that important? Because a custodial account does NOT work that way. Long term captial gains can afford preferential tax treatment, unlike ordinary income. The current tax code has limitations on the treatment of these types of gains versus earned or ordinary income, which is based on your income tax return. In many cases, the long-term capital gains rates are significantly lower than ordinary income rates applied ot the new Trump Accounts. In some cases, the long-term capital gains may even be tax-free. It pays to include your CPA or tax advisor when planning long-term investment strategies.
For my own son, who already has some legitimately earned income, participating in a Trump Account doesn't make a ton of sense. Why? Because we can utilize a Custodial Roth IRA. With a Roth, we lock in zero tax on the contribution, and it generates 100% tax-free growth and tax-free withdrawals as long as you play by the rules. I have zero reason to trade tax-free Roth gains for ordinary income gains down the road. Thanks, but no thanks! In saying that, I also realize that not everyone is self-employed and cannot employ their minor child, so there may be relevance for this type of structure for a good number of American families looking for ideas and ways to invest in their children.
The Bottom Line
If your child lacks earned income, and you want a tax-deferred growth engine that bridges the gap between a restrictive 529 college plan and a fully open UTMA, the American Opportunity Account is a brilliant tool. It's certainly a new class of investment for young folks and a way for parents to do something different than the same old, same old.
But if your kids have earned income, you should be considering maximizing Roth IRAs, and if you want total flexibility with your capital, you might want to sit this one out. This option may not be for you.
Although we can't help set up or manage these types of accounts, we go the extra mile to make sure we take your entire holistic picture into account—not just the latest headlines or what profits the firm. We are a privately held firm without a board of directors or investors putting pressure on our staff to generate revenue. If you’re wondering how this fits into your family's specific game plan, send me or one of our fine advisors a message. We're here to help you navigate it all.
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