The “One Big Beautiful Bill” (OBBB), signed into law on July 4, 2025, represents the most sweeping tax reform since the Tax Cuts and Jobs Act (TCJA). While the legislation spans hundreds of pages, individual taxpayers need to be aware of key points regarding a brand-new form of tax-advantaged savings accounts – Trump accounts – that may impact them.

Background Discussion

Trump accounts are a brand-new form of tax-advantaged savings account targeted toward minors. Conceptually, Trump accounts are modeled after Individual Retirement Accounts (IRAs), with slightly different rules.

Summary of OBBB Provisions

Trump accounts are targeted toward children (i.e., individuals under age 18). Children must be U.S. citizens and have a Social Security Number to qualify. Trump accounts can receive contributions from (1) individuals and (2) employers, tax-exempt entities, and government entities. The tax treatment of the contributed funds, and the earnings on those funds, depends on which type of contribution was made.

Contributions from individuals to Trump accounts are made with after-tax dollars. Trump accounts can receive contributions from individuals of up to $5,000 per year in the aggregate. Upon withdrawal of funds, initial contributions of this type are not subject to tax, but the earnings on the contributions are subject to regular income tax.

Contributions from employers, tax-exempt entities (such as private foundations), and government entities are not subject to the $5,000 aggregate contribution limit. However, contributions of this type must be made equally to all beneficiaries of a specific class (such as all children living within a certain area). Employers may contribute $2,500 per year per child to accounts of employees’ children. Upon withdrawal of funds, contributions of this type (and the earnings) are subject to regular income tax.

Typical IRA rules apply for taking distributions from Trump accounts. Generally, no withdrawals may be made before the year the beneficiary turns 18. Upon reaching this point, account holders can make withdrawals for any purpose that would also be allowed for early IRA distributions: first-time home purchase, education expenses, medical and disability expenses, etc. If withdrawals are taken for a nonqualifying purpose, they will incur the same 10% penalty that applies to early IRA distributions. Once the account holder reaches age 59½, withdrawals can be taken for any reason.

When parents of children born 2025-2028 file their tax returns, Trump accounts will automatically be set up for children born during those years (if not already established) to receive the $1,000 credit. This is a one-time credit (not an annual credit). The credit is automatic unless parents opt out. Until a child reaches age 18, their account must be invested in a mutual fund or exchange-traded fund that does not have annual fees or expenses of more than 0.1%.

Taxpayers and tax preparers should take note of the following items:

• Parents not wishing to have Trump accounts set up for their children born 2025-2028 must opt out, otherwise accounts will automatically be set up.
• While it likely makes sense to accept the $1,000 credit, parents should consider other investment vehicles for their children that may offer greater return and flexibility.

Contact your YHB advisor today to discuss how these changes can impact you.