A New Way to Save for Children – Politics Aside

A new way to save for children will become available next year as a result of tax legislation passed last summer. Over the decades, many new types of accounts have been introduced festooned with the name of their legislative sponsor, whether it's Senator William Roth and the eponymous Roth accounts or Senator Paul Coverdell with Coverdell Education Savings Accounts. These new child savings accounts, termed "Trump accounts" in the legislation, may turn some people off regardless of any advantages they may offer. Putting politics aside, let's take a look at these new accounts and whether they make sense to use—particularly given that seed money will be available for young savers.

Starting next year, U.S. citizen children born between 2025 and 2028 will be eligible for a $1,000 government contribution into these accounts. The election is expected to be available when filing taxes for 2025 or through a government website in the summer. In addition, philanthropists such as Michael Dell have committed to adding $250 to these savings accounts for a broader group of children—this time those aged 10 and under who live in ZIP codes with median household income under $150,000.

Apart from the seed money for younger savers, starting in July 2026 these accounts can be opened for US residents who are under 18 by the end of the year. They will have a $5,000 annual contribution limit from parents, family members, and friends, of which up to $2,500 can come from an employer of a parent. While the child is under 18, the accounts can be invested in low-expense indexed mutual funds and ETFs that are primarily invested in U.S. stocks. Based on initial IRS guidance, once the child turns 18 the account is treated similarly to a traditional IRA, with more flexibility in how the funds are managed. Contributions to these accounts do not affect the child's ability to contribute to a Roth or traditional IRA, assuming they have earned income.

Additional details will be released by the IRS, but enough is known to begin evaluating whether these child savings accounts are worth using. For most families, it will make sense to accept the government and philanthropic seed money for eligible children. The bigger question is whether parents should add their own money—and how these accounts compare with Roth and traditional IRAs, 529 college savings plans, and custodial investment accounts.

Under current guidance, these child savings accounts are treated as traditional IRAs rather than Roth IRAs, meaning qualified distributions generally become available after age 59½. As with IRAs, certain exceptions—such as qualified higher education expenses, first-time homebuyer costs, and qualified medical expenses—would not be subject to the 10 percent early withdrawal penalty. Unlike how most people use IRAs, contributions are not deductible and basis must be tracked to avoid double taxation.

So are these new child savings accounts right for most families? An easy yes is accepting the initial $1,000 government contribution and the additional $250 from Dell (and potentially others to come). But when it comes to saving additional money for a child's future, better options exist for many families. If a child has earned income, they can contribute up to $7,500 in 2026—or their earned income, if less—to a Roth IRA. A Roth IRA allows for tax-free growth over their lifetime and permits contributions to be withdrawn at any time for any reason.

A 529 college savings plan offers another compelling option. For Colorado residents, contributions provide a state income tax deduction (subject to annual limits), with growth free of state and federal tax when used for qualified higher education expenses, including trade schools. To be fair, expenses tend to be higher than the roughly 0.1 percent annual costs promised for these new savings accounts. Finally, parents can establish a custodial investment account in a child's name. While those funds legally become the child's at adulthood (rules vary by state), there are no limits on withdrawals, and when invested in tax-efficient ETFs, these accounts can be surprisingly effective.

To sum it up, these new child savings accounts are best used to capture any free contributions from the government, employers, and philanthropists. For most parents, however, there are better-established ways to save meaningfully for a child's future. For more information about these accounts, see trumpaccounts.gov.

David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. He can be reached at entreewealth.com. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.