More than 1 million people have already signed up for the new Trump accounts following a major publicity push by the White House even before the official July launch.
The promise of “free money” appears to be a major draw.
The federal government has said it will make a one-time $1,000 contribution into the accounts of all eligible children born on or after January 1, 2025, through December 31, 2028.
In addition, a growing number of companies have pledged to match the Treasury’s deposit for children of employees. Philanthropists in multiple states have also committed to seed accounts for certain qualifying families.
“The president has called on business leaders and philanthropists all around the country to get involved in the initiative,” Treasury Secretary Scott Bessent said during a speech at the Economic Club of Dallas.
According to the reports of CNBC, even with strong early interest, financial experts say many details about how the program will work are still unclear.
“There are more unanswered questions than answered at this point,” said Mary Morris, CEO of Commonwealth Savers to CNBC.
“There is a lot of good stuff there, but there are still a lot of unknowns about how it’s going to work,” she added.
How the $1,000 works
Trump accounts also known as 530A accounts will receive a $1,000 federal deposit for eligible newborns. Families do not need to contribute their own money to receive that initial amount.
But the account is not a simple cash gift. It is an investment account that grows over time and taxes will apply when money is withdrawn.
“These accounts behave like [individual retirement accounts],” certified financial planner Marianela Collado, CEO of Tobias Financial Advisors in Plantation, Florida told CNBC.
The government’s $1,000 contribution is considered pre-tax. That means both the original deposit and any investment growth will be subject to regular income taxes when withdrawn in the future.
In addition, withdrawing funds before age 59 and half could trigger a 10 per cent penalty with some exceptions.
So while the $1,000 is provided upfront at no cost to families, the money is not entirely “free” in the long run because taxes will eventually apply.
What about taxes when the money is withdrawn?
According to CNBC, tax treatment at withdrawal is another area where clarity is needed.
Pretax funds will be subject to regular income taxes at withdrawal, Collado said. Withdrawals before age 59 and half could also trigger a 10 per cent penalty, with some exceptions.
Trump account funds grow tax-deferred. There is no upfront tax break for after-tax contributions, but earnings will be taxed upon withdrawal. Pretax contributions are excluded from income initially but both the contribution and future growth will be taxed later.
Here’s the breakdown:
- Direct parent contributions: after-tax
- Pilot program $1,000: pre-tax
- Employer contributions: pre-tax
- Other qualified contributions: pre-tax
- Future contribution growth: pre-tax
Experts stress that careful record-keeping will be critical. Without tracking after-tax contributions separately so the account holders could end up paying income tax on the full withdrawal amount.
Lira said that the long-term tracking of contributions and tax treatment is “clearly something that’s of concern and consideration for the financial institutions.”
