NorCo Council Member Jason Boulette: Trump Accounts Have Their Pitfalls

One of my takeaways from President Donald Trump's Tuesday night SOTU was my praise for Trump accounts, a special kind of IRA that can be set up for children. Uncles Sam will contribute $1,000 to accounts for babies born between 2025 and 2028, with the program officially launching on July 4, 2026, to coincide with the 250th anniversary of U.S. independence. The funds must be invested in low-fee index funds that primarily hold U.S. stocks. Now as anyone who has seen my estate knows, I'm no financial expert. But I'm thinking $1,000 is $1,000. Unlike me, NorCo Council member Jason Boulette actually is a financial expert. And while he agrees that those who can take the money should do so, he pretty much thinks that's all you should do. He has given me permission to share his analysis with the "disclaimer that the information is intended for educational purposes and does not constitute investment, legal, or tax advice.

When you choose to invest, there are a lot of different account options under the tax code. You want to choose the one that will yield the greatest benefits for yourself and your child. And in that regard, Trump accounts are simply, mathematically, worse than just about any other option.

First, look at the Trump accounts' treatment in the tax code against IRAs. There are two main types of IRAs, traditional and Roth. Traditional IRAs are tax-deferred, meaning you get a tax deduction for contributing (the pro), but you'll later pay income tax on withdrawals including on all gains (the con). With Roth IRAs, your contributions are with after-tax dollars, meaning you've already paid income tax on the money that goes in and get no deductions for contributing (the con), but on the other hand your earnings grow tax-free and you pay no tax at all on withdrawals (the pro). With Trump accounts, you contribute post-tax dollars like a Roth, but your child will need to pay income tax on all the earnings, like a traditional. It combines the cons of both IRA structures with neither of the pros.

When your child turns 18, it converts into a traditional IRA that you got no deductions for. Note that because it converts into a traditional IRA, there's a 10% penalty for withdrawals pre-retirement from Trump accounts that don't meet special exceptions like education or buying a first-time home.

Now, compare Trump accounts to alternatives you could use to invest for your child:

• Coverdell IRAs: these allow you to invest for educational expenses. Coverdells have a $2,000 annual contribution limit vs Trump's $5,000 annual limit; they also have an income restriction of $220,000 for a married couple. Coverdells are not tax deductible, however unlike with Trump accounts, withdrawals (including on gains) are tax-free if used for educational expenses.
• 529s: on the whole, a MUCH better investment choice. Again, these are primarily to save for educational expenses, but the definition is pretty broad (they can be used for room & board, for example). Contribution limits are much higher for 529s: in 2026, the limit is $19,000, whereas for Trumps, it's $5,000. While 529s don't allow for federal tax deductions, they allow for state income tax deductions in almost every state. Here in Pennsylvania, that'll get you a deduction on our flat 6% income tax. Qualified 529 withdrawals are tax free. If your child is withdrawing from a Trump account for educational expenses, they're paying income tax on all the gains. If they're withdrawing from a 529 for educational expenses, they're paying no tax on any gains. The one edge I'd give to Trump accounts over 529s is that while both can be converted to IRAs, there appears to be no cap on the Trump conversions whereas there's a $35,000 lifetime cap per child for 529 to IRA conversions. However, the 529 can be rolled over to a Roth IRA as opposed to a traditional for a Trump account -- that's $35,000 your child will never pay taxes on.
• UGMA/UTMA: these are custodial accounts that are managed by the guardian, but the money invested into them belongs to the child. You can contribute up to $19,000 in these annually without triggering gift taxes. Again, no tax deductions for contributions. Unlike 529s and Coverdells, they do not grow tax-deferred. However, up to $1,350 of interest/dividend growth annually will be tax free (standard deduction), and $1,351-2,700 of growth will be taxed at the child's tax rate of 10%. Your child will be able withdraw the money in the UGMA/UTMA without paying a tax penalty pre-retirement. I've run simulations and have looked at other investors' simulations that show that even though this is a taxable account, your child will end up ahead here, because long-term holdings will be taxed as long term capital gains, and Trump account gains will be taxed as income.
• Roth IRA: when your child is old enough to get a job with earned income, help them set up a Roth IRA and contribute the annual maximum to that. The Trump account will, at age 18, convert to a traditional IRA. Your child can roll over money from his traditional to his Roth IRA, but depending on when it's done, it could be subject to Kiddie Tax rules (which means up to age 24, your child could pay YOUR income tax rate for any conversions). If you funded an UGMA/UTMA for your child, once they become an adult and get the money, they can use that to fund their Roth in future working years. With the Trump account (like a traditional IRA), you pay a 10% penalty (on top of the income taxes) for any money withdrawn for a reason other than education/buying a first time home. With a Roth, your child can withdraw any of the contributions (as opposed to the gains) without paying any tax penalty.
• Just invest in a traditional taxable brokerage account that your child will inherit when you die. The con here is you'll be dead when your child gets it (or, again, you can give up to $19,000 annually without triggering gift taxes), but they won't get the bulk of the Trump account money until they're retired. The pro is that thanks to stepped up basis, they'll get a massive tax advantage with this money. Again, like with the UGMA/UTMA, run a simulation where you invest the same amount in a taxable brokerage and a Trump account, and the end result is the taxable brokerage account will end up with a lot more money.

The bottom line is that an account where you're contributing after tax money, but the gains are taxed as income and not long term capital gains (or tax free) is much worse than just about every other option. Again, like I said, everyone whose child is eligible should take the $1,000 federal contribution. But when it comes to investing your own money, you should prioritize all these other accounts over a Trump account.

Another plug for 529s: here in Pennsylvania, our former Treasurer, Joe Torsella, started a program, Keystone Scholars, where every child born in the state gets $100 from the state in their 529 (the legislature later made this $100 permanent; with Trump accounts, the free $1,000 goes away at the end of 2028). If you contribute further to the 529, you get a tax deduction. And your child will not pay taxes on any of that money or the growth in the account.