Can a Trump Account Turn Into $3 Million Tax Free?

Over the last few months the financial planning community has been abuzz about Trump accounts, with a well-known national publication claiming something that sounds implausible. The claim? By contributing to Trump accounts every year of childhood and executing a tax strategy, your child could have an account worth over $3 million tax-free.

So what's the catch? Before we dig into the assumptions, let's take a closer look at Trump accounts, which were created by the One Big Beautiful Bill Act last summer. Parents and guardians can contribute to Trump accounts for eligible children starting July 4 of this year, and the federal government will kick in $1,000 to get it started for those born between 2025 and 2028. The annual contribution limit is $5,000 per child, which can come from individuals, employers (up to $2,500 on a pre-tax basis), or a combination of both, with government entities and philanthropies able to contribute on top of that.

The Trump account is invested in low-cost mutual funds or ETFs that track U.S. stock indices such as the S&P 500. Once a child turns 18, the account moves under their control and, under current IRS guidance, is generally expected to be treated similarly to a traditional IRA. The funds can be retained for retirement or accessed for certain qualified purposes such as higher education expenses or a down payment on a home.

It's a long way from $1,000 in government seed money to $3 million tax-free, so how do you get there? The assumptions are that the child's account is funded every year through age 17 with $5,000 annual contributions in today's dollars. The account is then assumed to grow at 7% annually, which is close to the inflation-adjusted return of U.S. equities over the long term.

The next step is that once the child becomes an adult, they do not touch the account and at age 24 spend over $40,000 in taxes in today's dollars to convert the account to a Roth IRA. That's a lot of assumptions packed into one number, including future tax rates, state taxes and what your child's income looks like decades from now. This conversion is taxable because the growth in the Trump account becomes taxable upon distribution. The final step is simply waiting until age 59½, by which point the account could potentially exceed $3 million.

As long as you accept the assumptions, this scenario is plausible. It echoes the children's fable of Stone Soup, in which a traveler starts with a pot of water and a stone and somehow ends up with a savory and nutritious soup. Just don't forget the carrots, onions, potatoes, meat and spices! With Trump accounts, we must remember that we're also talking about roughly $90,000 of contributions in addition to the tax cost of the Roth conversion.

More than anything, this financial alchemy is about the power of saving early in life, doing so regularly, investing in low-cost diversified stock funds, and leaving the money alone until retirement. You don't need Trump accounts to benefit from this math.

Before funding a Trump account beyond the initial government contribution, many families should first consider other tax-advantaged opportunities. A working teenager can contribute earned income to a Roth IRA, avoiding the need for a future taxable Roth conversion. Likewise, 529 plans remain attractive because they offer tax-free growth for education and, under current law, limited Roth IRA conversion opportunities if the funds are not ultimately needed for college. Finally, parents should not overlook their own Roth retirement accounts, which often provide superior tax benefits and greater flexibility.

In spite of the benefits of Trump accounts, you should be aware of potential pitfalls. Questions remain about how these accounts may interact with future financial aid formulas. Also, if your teenager is not financially savvy, it's wise to remember that once they turn 18 they have complete control over their account. This contrasts with typical custodial accounts such as Roth IRAs and UTMA accounts, which parents can generally control until the child reaches age 21 in many states. Finally, we may see legislative changes in the future that affect the availability or treatment of these accounts.

My intention here is not to warn you away from Trump accounts. For many families, accepting the government seed money and other contributions will be an easy decision. Other no-brainers include accepting employer and philanthropist contributions, such as the Dell Foundation's $250 donation program for qualifying children.

The broader lesson is that a $3 million projection isn't really about Trump accounts at all. It's about the power of starting early, saving consistently and allowing compound returns to do the heavy lifting over decades — what Einstein reportedly called the eighth wonder of the world.

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.