Client Education · Planning & Tax

For the first time, families can begin building Roth wealth for a child from a very young age—and the numbers are striking.

Until now, there was no good way to start saving for a child’s retirement. Roth and traditional IRAs require earned income, and young children don’t have any. Trump accounts change that. Set to launch this July, they allow up to $5,000 per year in after-tax contributions for any child—regardless of age—and open a path to Roth conversion that simply didn’t exist before.

What Is a Trump Account?

At its core, a Trump account functions like a retirement account for a child who has no earned income. Contributions of up to $5,000 per year are made with after-tax dollars, are non-deductible, and virtually anyone can contribute—parents, relatives, friends, and employers. Withdrawals are not permitted before age 18, at which point the account follows standard traditional IRA rules.

One important distinction on the tax treatment: your after-tax $5,000 contributions create basis and are never taxed again. The $1,000 federal seed money available to newborns born between 2025 and 2028, along with any employer or charitable contributions, does not create basis and is fully taxable upon withdrawal. Before age 18, investments are limited to U.S. equity index funds with expense ratios of 10 basis points or lower. After 18, the account holder can diversify fully.

For the first time, families have a vehicle specifically designed to build tax-advantaged retirement savings for a child from the very beginning.

The Roth Conversion Opportunity

This is the real story. Once the account transitions to traditional IRA rules at age 18, it can be converted to a Roth IRA. When that conversion happens, only the earnings above your original after-tax contributions are taxable—the contributions themselves have already been taxed and come out free and clear. That taxable earnings portion is included in ordinary income for the year of conversion, and from that point forward everything inside the Roth grows and is eventually withdrawn completely tax-free—provided Roth qualified distribution requirements are met.

A few mechanics to understand, including one important advantage over simply withdrawing:

• Trump accounts are not aggregated with other traditional IRAs for the pro rata rule, which keeps the conversion math clean.
• Conversions are not capped, unlike 529-to-Roth rollovers.
• The conversion does not trigger the 10% early withdrawal penalty—unlike a straight withdrawal before age 59½, which would. The conversion is taxable, but only at ordinary income rates on the earnings portion, with no additional penalty.
• Conversions are subject to kiddie tax rules until age 24, so many families will wait until the child ages out before converting. Conversion taxes should be paid with outside assets to preserve the full Roth balance.

How Much Could This Actually Be Worth?

To illustrate the potential, consider a hypothetical: a parent contributes $5,000 per year from the time a child turns 5 through age 18—14 years of contributions totaling $70,000 of after-tax basis. Assuming a hypothetical 8% annual rate of return compounded annually, the account grows to approximately $131,000 at age 18.

No further contributions are required. By age 24, when kiddie tax rules no longer apply, the balance has grown to roughly $208,000. At that point the family converts the account to a Roth. The taxable portion is approximately $138,000 (the growth above basis). Assuming this conversion is the child’s only income that year and applying 2026 federal tax brackets for single filers with the $16,100 standard deduction, the estimated federal tax bill is around $22,000—an effective rate of approximately 16%.

How that tax bill is paid makes a significant difference. If paid with outside funds, the full $208,000 stays in the Roth and compounds untouched—growing to approximately $3,200,000 by age 59½. If instead the tax is withheld from the account itself, the starting Roth balance drops to roughly $186,000, and the same 8% growth rate produces approximately $2,850,000 by age 59½—a difference of roughly $334,000 in tax-free retirement wealth, simply from where the tax bill is paid.

What Happens If a Child Just Withdraws the Money at 18?

If a child reaches 18 and simply pulls the money out rather than converting to Roth, the tax consequences are meaningful. The earnings portion is taxed as ordinary income, and since the child is under 59½, a 10% early withdrawal penalty applies on top of that—though only on the taxable earnings, not on the original after-tax contributions. The conversion path avoids that penalty entirely, which is a significant advantage over simply taking the money out.

How Does It Compare to Other Accounts?

For long-term retirement savings and early Roth accumulation, Trump accounts stand alone—no other vehicle allows this kind of Roth build-up for a child without earned income. That said, other accounts still serve their purposes better for other goals:

• 529 plans remain the best tool for education savings.
• UTMAs and custodial accounts offer flexibility for near-term needs like a first home or emergencies.
• Trump accounts are purpose-built for retirement, and the Roth conversion path is where their value is most pronounced.

The chart below, from Vanguard, illustrates how each account type stacks up across four common goals.

What to Do Before July

Several details are still being finalized, and the Trump Accounts app—while already live—is a work in progress. The eligible investment list, state tax treatment, and FAFSA rules are all areas where further regulatory guidance is expected before July.

In the meantime, the practical steps are modest:

• If you have a newborn born between 2025 and 2028, make sure you fill out Form 4547 to claim the $1,000 federal seed money—it is genuinely free.
• If you are thinking about Roth conversion, factor in the kiddie tax timeline and whether it makes sense to wait until the child is 24.
• Talk to your advisor about how a Trump account fits alongside any existing 529s, UTMAs, or custodial accounts.