Trump Accounts
Structure, Incentives, and Policy Design Considerations in the 2025 Federal Tax Legislation
Trump Accounts represent more than a new tax-preferred savings vehicle for children. They introduce a structural approach to early-life asset formation that intersects with retirement policy, wealth distribution, charitable tax incentives, and behavior impacting the level of household savings. By seeding accounts at birth and converting them into traditional retirement accounts in adulthood, the program blends short-term fiscal decisions with long-horizon asset policy. These accounts are interesting and have some potential, but some tweaks are essential if they are to successfully expand savings for households with modest income.
Executive Summary — Key Findings
Structural Design: Trump Accounts function as hybrid child asset accounts that transition into traditional IRAs at age 18. The principal structural distinctions occur before adulthood, primarily in contribution rules.
Seed Funding Is Temporary: The $1,000 federal birth deposit applies only to children born between 2025 and 2028. This creates a built-in fiscal cliff in what is otherwise framed as a long-term wealth-building policy.
Contribution Asymmetry: Private and employer contributions before age 18 are capped at $5,000 annually per beneficiary, but qualified general (charitable or governmental) contributions are not subject to that cap, creating potential geographic and philanthropic concentration effects.
Likely Distributional Skew: As with 529 plans, voluntary contributions are likely to be concentrated among higher-income households. The universal seed deposit provides a baseline benefit, but its sunset limits long-run equalizing impact.
Substitution Risk: The accounts may shift savings across vehicles (529s, Roth IRAs) rather than substantially increasing aggregate household saving, depending on behavioral response.
Early Liquidation Weakens Long-Term Goals: Like traditional IRAs and 401(k)s, accounts may be partially or fully liquidated prior to retirement subject to taxes and penalties. Empirical research on retirement account leakage suggests early withdrawals are concentrated among financially distressed households, undermining long-term accumulation.
Lock-Up Mechanisms May Strengthen Long-Term Saving: Behavioral evidence suggests that partially restricting early withdrawals may better protect lifetime wealth accumulation than relying solely on tax penalties as a deterrent.
Potential Role in Retirement Policy: As an additive savings vehicle, Trump Accounts do not divert Social Security payroll taxes and could modestly supplement retirement income if made permanent and allowed to accumulate over time. Their long-run impact depends on sustained participation and preservation of balances.
Governance and Compliance: Like all programs involving financial transfers, Trump Accounts carry some risk of misuse. They operate within existing contribution limits, IRS reporting requirements, and standard financial compliance frameworks.
Introduction
Trump Accounts were authorized in the 2025 federal tax legislation as tax-advantaged asset accounts established for eligible children. The accounts allow for a $1,000 contribution from the government at birth. Additional annual contributions from several sources are allowed.
The account stimulates household savings through three channels.
First, the $1,000 gift from the government at birth provides savings to all households regardless of wealth. The $1,000 federal seed contribution applies only to eligible children born after December 31, 2024, and before January 1, 2029. The seed money for future cohorts will not be available unless Congress reinstates this authority. The right to create accounts and the right to make annual contributions from various sources will not sunset, just the seed money for contributions at birth.
Second, unlike IRAs, contributions to Trump savings accounts do not require the existence of earned income. Trump savings accounts prior to age 18 compete more closely with 529 plans, which also allow for contributions from people without earned income, than IRAs.
Third, Trump Accounts allow contributions prior to age 18 from a wider variety of parties, subject to defined annual limits. Before age 18, private and employer contributions together may not exceed $5,000 per beneficiary per year (indexed after 2027). This is not a per-contributor limit. Instead, it is a ceiling on the total amount that may be deposited from private and employer sources combined in a given year for each child.
Employer contributions made under Section 128 are further limited to $2,500 per employee per year and count toward the overall $5,000 annual maximum. Thus, in any year before age 18, no more than $5,000 in total may be contributed from parents, relatives, the beneficiary, employers, or other private individuals, and no more than $2,500 of that total may come from an employer.
Certain categories of contributions are treated differently. Federal seed deposits, qualified general contributions, and qualified rollovers do not count toward the $5,000 annual limit. Qualified general contributions may be made by governmental entities or by organizations described in Section 501(c)(3) and must be allocated to a defined class of eligible beneficiaries rather than to individually selected children.
Beginning January 1 of the year the beneficiary turns 18, the account becomes a traditional IRA for all practical purposes. Contributions thereafter must satisfy ordinary IRA earned income requirements and annual contribution limits. Distributions follow traditional IRA taxation rules, including inclusion of the taxable portion in ordinary income and application of the 10 percent early distribution penalty under § 72(t) for withdrawals taken before age 59½ unless a statutory exception applies. The account is also subject to the standard required minimum distribution rules at the applicable statutory age.
In this respect, the principal structural distinction lies before age 18 rather than after. The childhood phase modifies contribution rules — eliminating the earned income requirement and permitting the federal seed deposit and class-based contributions — while the adult phase operates within the existing traditional IRA framework.
Comments
Comment 1 — Time-Limited Pilot Funding and Fiscal Cliff Design
The statutory decision to limit the $1,000 federal pilot contribution to children born between January 1, 2025, and December 31, 2028, introduces a built-in funding cliff into what is otherwise presented as a long-term asset-building policy. Children born on or after January 1, 2029, are ineligible for the federal deposit absent further congressional action.
This phase-out structure embeds a recurring fiscal deadline into what is presented as a long-term asset policy. The legislative cycle often begins with the question of how to avert a scheduled expiration and only thereafter moves to the next round of policy additions. The pattern is familiar from prior episodes such as the Bush-era tax rate expirations and subsequent fiscal cliff negotiations, as well as the debate over enhanced ACA premium assistance.
The magnitude of the cliff associated with this one program is modest but not trivial. With roughly 3.6 million U.S. births per year, the phase-out represents approximately $3.6 billion annually in federal deposits for new cohorts once the pilot window closes.
The more significant concern is structural. If early-life asset building is intended to be a durable component of national savings policy, temporary authorization undermines predictability and reduces the likelihood of sustained participation and compounding. Long-horizon policy objectives are poorly served by recurring sunsets that manufacture fiscal deadlines rather than pairing stable authorization with transparent and sustainable financing from the outset.
Comment 2 — Philanthropic Contributions and Structural Asymmetry
Recent reporting that Michael Dell and his wife have pledged funds to support Trump Accounts through a charitable vehicle highlights an important structural feature of the program: the treatment of qualified general contributions.
Under IRS guidance, contributions made by a governmental entity or a 501(c)(3) organization may qualify as “qualified general contributions.” These are distinct from private parent or employer contributions. Unlike private deposits, they are not counted toward the $5,000 annual cap that applies to parents, relatives, and other private individuals, nor are they subject to the $2,500 employer sub-limit.
Qualified general contributions must be made to a “qualified class” of beneficiaries defined by neutral criteria. Contributions are not donor-directed to individually chosen named beneficiaries. The class must be administratively defined and implemented through a 501(c)(3) or governmental channel consistent with Treasury rules. As a result, highly personalized targeting would be difficult. A donor could not simply select fifty specific children and deposit $20,000 into each of their accounts in the manner of a private transfer.
Private family contributions are tightly capped on a per-child, per-year basis. Qualified general contributions, while subject to class-definition and administrative constraints, are not subject to the same fixed annual dollar ceiling. This creates the potential for uneven account balances depending on whether particular geographic areas or defined groups attract philanthropic participation.
Comment 3 — Charitable Dollars and Policy Priorities
Using charitable contributions to support Trump Accounts raises a basic question of priority. Philanthropic funding is episodic and driven by donors. Even large pledges are small relative to national retirement savings gaps and do not address the structural causes of under-saving.
By contrast, the 2025 tax legislation’s education-focused charitable contribution provision targets a specific and identifiable problem — access to private schooling and related educational opportunity — that has attracted sustained interest from high-net-worth donors. Education contributions yield visible and measurable effects within a short time horizon, while charitable deposits into long-term savings accounts depend on decades of compounding and uncertain behavioral response.
If the tax code is going to expand incentives for charitable giving, it is reasonable to ask whether mechanisms modeled on the education provision should be broadened to address other clearly defined public priorities rather than diffusing incentives across generalized savings accounts.
Even highly publicized commitments are modest relative to aggregate retirement saving gaps. They may benefit particular cohorts, but they do not alter the structural determinants of long-term savings behavior.
Comment 4 — Interaction with 529 Plans and IRAs
Trump Accounts are likely to compete more directly with 529 plans than with IRAs during childhood. Like 529s, they do not require earned income and allow contributions from multiple parties. Once beneficiaries begin working, some substitution from Roth IRAs is also possible. The introduction of a new vehicle may therefore shift savings across accounts rather than materially increase aggregate saving.
As with other tax-advantaged savings vehicles, voluntary contribution behavior is likely to be concentrated among higher-income households. Research on 529 participation shows that families with greater income and liquidity disproportionately fund these accounts. Trump Accounts share that structural feature: while contributions are capped at $5,000 annually before age 18, families with resources are more likely to contribute up to the limit and benefit from long-term compounding.
The principal distributional benefit for lower-income households is the universal $1,000 seed deposit. However, because that seed funding sunsets for future cohorts, the program’s equalizing effect is both limited in scale and is scheduled to automatically sunset unless renewed.
Comment 5 — Early Liquidation Risk and Structural Preservation
Trump Accounts, like traditional IRAs and 401(k) plans, may be partially or fully liquidated prior to retirement, subject to ordinary income taxation and a 10 percent early distribution penalty on the taxable portion. While households legitimately require liquidity for emergencies, the permissibility of full disbursement raises concerns for a program intended to promote long-term asset accumulation.
Empirical evidence reinforces this concern. Using data from the 2018 National Financial Capability Study, Bernstein (2021) finds that individuals who tap 401(k) funds prior to retirement are disproportionately those with weak household balance sheets. The odds of accessing 401(k) funds are more than four times higher for households with consumer debt and more than twice as high for individuals with poor credit ratings, with even larger effects for households with underwater mortgages. Early withdrawals are therefore concentrated among financially vulnerable households — precisely those most likely to enter retirement with inadequate resources.
These findings are consistent with a broader literature showing that retirement “leakage” materially reduces long-term accumulation. Behavioral research suggests that partial illiquidity can function as an effective commitment device. Evidence from commitment savings products shows that withdrawal restrictions significantly increase savings relative to fully liquid accounts (Ashraf, Karlan, and Yin 2006). Similarly, pre-commitment mechanisms in U.S. retirement plans increase contribution rates and balances (Madrian and Shea 2001; Thaler and Benartzi 2004). Laibson’s (1997) model of hyperbolic discounting provides theoretical grounding, demonstrating why individuals may demand illiquid assets to protect future consumption from present-biased decision-making.
The federal seed deposit in a Trump Account is a public transfer — in economic terms, a gift — intended to promote long-term asset formation. If that publicly financed capital can be fully converted into near-term consumption, society receives little durable return on the initial subsidy. In that case, the account risks functioning more like a delayed unconditional cash transfer than a sustained retirement asset.
An alternative design would preserve flexibility for emergencies while protecting a defined portion of the account — for example, locking the original seed contribution and a percentage of accumulated funds until retirement, while permitting limited taxable withdrawals without penalty. Such a structure would better align liquidity access with preservation of the public investment.
The broader policy question is whether tax penalties alone sufficiently safeguard long-term asset policy. Evidence on retirement leakage and behavioral bias suggests that partial structural preservation, rather than reliance on deterrence alone, may better align account design with the objective of lifetime wealth accumulation.
Comment 6 — Annual Credits, Participation Incentives, and the Case for Withdrawal Constraints
As currently designed, Trump Accounts rely primarily on a one-time seed contribution (for eligible cohorts) and voluntary contributions thereafter. A modest annual tax credit tied to contributions could strengthen the program’s ability to stimulate household saving, particularly among moderate-income families for whom liquidity constraints and weak marginal incentives are the main barrier to participation.
A small, predictable annual credit has two attractive features. First, it creates an ongoing reason to keep the account active rather than treating it as a one-time gift vehicle. Second, if the credit is refundable or partially refundable, it can reach households with limited tax liability, improving participation and limiting the tendency for tax-advantaged savings vehicles to be used primarily by higher-income households.
An annual credit structure would strengthen the argument for partial withdrawal constraints or preservation requirements. Without such constraints, the credit could subsidize short-term liquidity behavior: households could contribute to claim the credit and then withdraw soon after, paying penalties but still converting the tax subsidy into near-term spending. The public benefit would be attenuated, and the program would resemble a consumption subsidy with friction rather than a savings incentive.
Comment 7 — Relationship to Social Security Reform
Long-term projections indicate that Social Security reform will likely involve some combination of future benefit adjustments and increased payroll taxation. The financing imbalance has been deferred for decades, which increases the magnitude of eventual adjustments required to restore long-run solvency.
Against that backdrop, a permanent, universal asset account framework could serve a constructive role. If broadly adopted and sustained over time, universal tax-advantaged accounts would expand the base of private retirement saving. The long-run effect would be a retirement system in which households are less exclusively reliant on Social Security income and more likely to possess at least some independent private assets.
In that sense, Trump Accounts — as currently structured — appear additive rather than diversionary. They do not reduce Social Security payroll tax revenue, nor do they reallocate mandatory contributions into private accounts. Contributions are voluntary and supplemental. The program therefore expands the private savings margin without directly weakening the Social Security trust fund.
This distinction matters. Proposals that create individual accounts by diverting payroll taxes from Social Security into private investment accounts can compound solvency pressures in the short and medium term. Diverted contributions reduce current inflows to the trust fund while obligations to current retirees remain unchanged, increasing transition financing challenges.
An additive savings framework avoids that destabilizing dynamic. By encouraging additional voluntary saving, it strengthens the private pillar without weakening the public one.
Effectiveness depends on permanence and scale. A time-limited pilot structure or a design vulnerable to early full liquidation limits the program’s ability to meaningfully offset future reductions in Social Security replacement rates.
Comment 8 — Governance and Integrity Considerations
All public programs that involve financial transfers carry some risk of misuse. Trump Accounts permit third-party contributions, but private deposits are capped per beneficiary. and accounts must be held at regulated financial institutions subject to existing IRS reporting, Know Your Customer requirements, and anti–money laundering rules. There is no structural feature that makes these accounts uniquely vulnerable relative to IRAs or 529 plans or other public subsidies. Nonetheless, ethics disclosure regimes and enforcement mechanisms should clearly incorporate third-party deposits into dependent accounts to ensure transparency and maintain public confidence.