More than a million people have already signed up for Trump’s new accounts after a major publicity campaign by the White House even before the official launch in July.
The promise of “free money” seems to be a big draw.
The federal government said it will make a one-time contribution of $1,000 to the accounts of all eligible children born on or after January 1, 2025, through December 31, 2028.
In addition, an increasing number of companies have pledged to provide the equivalent of a treasury deposit to employees’ children. Philanthropists in multiple states have also committed to providing initial accounts to some eligible families.
“The President has called on business and philanthropists across the country to participate in the initiative,” Treasury Secretary Scott Besent said during a speech at the Economic Club of Dallas.
As CNBC reports, 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,” Commonwealth Savers CEO Mary Morris told CNBC.
“There are a lot of good things, but there are still a lot of unknowns about how this will work,” she added.
How does $1000 work?
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 this 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 you withdraw the funds.
“These calculations act like [individual retirement accounts]Marianela Collado, certified financial planner and CEO of Tobias Financial Advisors in Plantation, Florida, told CNBC.
The government’s $1,000 contribution is considered pre-tax. This means that both the original deposit and any investment growth will be subject to regular income taxes when withdrawn in the future.
Additionally, withdrawing funds before age 59½ can result in a 10 percent penalty with some exceptions.
So, while the $1,000 up front is provided at no cost to families, the money isn’t completely “free” in the long run because taxes will eventually apply.
What about taxes when the money is withdrawn?
According to CNBC, tax treatment upon withdrawal is another area that needs clarity.
The pre-tax funds will be subject to regular income taxes upon withdrawal, Collado said. Withdrawals before age 59½ can also trigger a 10 percent penalty, with some exceptions.
Trump’s account money grows tax deferred. There is no tax relief offered for after-tax contributions, but earnings will be taxed on withdrawal. Pre-tax contributions are excluded from income initially but the contribution and future growth will be taxed later.
Here’s the breakdown:
- Direct parental contributions: after taxes
- $1000 Demo: Before tax
- Employer contributions: before tax
- Other eligible contributions: Pre-tax
- Future contribution growth: before tax
Experts stress that careful record-keeping will be crucial. Without tracking after-tax contributions separately so account holders end up paying income tax on the full withdrawal amount.
Tracking contributions and long-term tax treatment is “obviously something of concern and consideration for financial institutions,” Lira said.
