Tax treatment and benefits – understanding the tax implications

Previously in this series: Articles 1–2 covered why to act now and how Trump Accounts work mechanically.

The tax treatment paradox

Trump Accounts occupy an unusual middle ground in the tax-advantaged account landscape:

• NOT like Roth IRAs: Contributions aren’t deductible, but withdrawals aren’t tax-free either
• NOT like traditional IRAs: You can’t deduct contributions during the growth period
• NOT like 529 plans: No tax-free withdrawals for education
• But better than taxable accounts: Growth is tax-deferred, avoiding annual capital gains taxes

Understanding the tax implications is crucial because how money enters the account determines how it’s taxed when it comes out.

Four types of money, four tax treatments

Trump Accounts can contain four distinct types of contributions, each with different tax consequences and long-term Trump Accounts tax implications:

Type 1: Individual after-tax contributions (parents, grandparents, friends)

How it’s treated going in:

• No tax deduction for the contributor
• Made with after-tax dollars (you already paid income tax)
• Creates "tax basis" in the account

How it’s treated coming out:

• These contributions can be withdrawn tax-free (you already paid tax)
• Only the earnings on these contributions are taxable

Example:

• Grandma contributes $5,000
• It grows to $8,000
• When withdrawn: $5,000 comes out tax-free, $3,000 is taxable income

Type 2: Employer contributions

How it’s treated going in:

• Tax-deductible business expense for the employer
• Not included in the employee’s taxable income (tax-free benefit)
• Does NOT create tax basis

How it’s treated coming out:

• Fully taxable as ordinary income when withdrawn
• Both the contribution and growth are taxed

Type 3: Government and charitable contributions

How it’s treated going in:

• Not included in the child’s taxable income
• Does not create tax basis

How it’s treated coming out:

• Fully taxable as ordinary income when withdrawn
• Both the contribution and growth are taxed

Type 4: Qualified Rollovers

Tax treatment: Carries over the tax basis from the original Trump Account.

Why tax basis matters

"Tax basis" is the amount you've already paid tax on. It's critical to track because the IRS won’t tax you twice on the same money – but only if you can prove you already paid tax on it.

Calculating tax basis

Your child’s tax basis in the Trump Account includes:

• All contributions from individuals – parents, grandparents, friends
• Any investment earnings

Example: Complex account

Over 18 years, the account receives:

• Government: $1,000
• Parents: $5,000/year × 18 years = $90,000
• Employer: $0

Total contributions: $91,000
Account grows to: $250,000
Tax basis: $90,000 (only the parents’ after-tax contributions)

Tax treatment during the growth period (Birth to Age 18)

No annual tax reporting

Good news: During the growth period, the account generates no taxable income for the child or parents.

• No tax on dividends
• No tax on capital gains
• No tax on growth
• No reporting required on your tax return (except tracking contributions)

The custodian (financial institution) handles reporting to the IRS.

Exception: Excess contributions
If contributions exceed $5,000 in a year (excluding government/charity), the excess is subject to a 6% excise tax each year until corrected.

How to fix it: The custodian should return excess contributions (and earnings on those contributions) to avoid ongoing penalties.

Tax treatment for individual contributors

The harsh reality: no deduction
Unlike contributions to your own traditional IRA, you get zero tax benefit when contributing to a child's Trump Account.

Comparison:

Gift tax considerations

Trump Account individual contributions are considered gifts for federal gift tax purposes.

The good news: In 2026, you can give up to $19,000 per person ($38,000 if married) without filing a gift tax return or using any lifetime exemption.

For Trump Accounts:

• A $5,000 contribution is well below the $19,000 threshold
• Most families will never encounter gift tax issues

Tax treatment for employers: a valuable new benefit

The employer's perspective

Tax advantages for companies:

• Fully tax-deductible as a business expense
• Not subject to payroll taxes (unlike wages)
• Relatively affordable ($2,500 cap per employee keeps costs manageable)
• Strong employee benefits for recruiting and retention

The employee's perspective

This is one of the best tax deals available:

• $2,500 excluded from taxable income – you pay $0 in income tax on this benefit
• No Social Security or Medicare tax
• No state income tax (in most states)
• Immediate 100% "return" compared to receiving $2,500 in taxable wages

Critical rules for employer contributions

The per-employee cap

• $2,500 maximum per employee, regardless of the number of children.

The dependent requirement

Employer contributions can only go to:

• Employees themselves (if under age 18), or
• Employees' dependents as defined by tax law

Tax treatment at withdrawal (Age 18+)

The basic rule: ordinary income tax
Under current Trump account withdrawal rules, when your child withdraws money after age 18, it's taxed as ordinary income – the same rate as wages or salary.

Not eligible for:

• Capital gains rates
• Qualified dividend rates
• Any special tax breaks

The 10% early withdrawal penalty
Withdrawals before age 59 typically face an additional 10% penalty on top of ordinary income tax.

Exceptions to the 10% penalty

The penalty does NOT apply if withdrawals are used for:

• Qualified higher education expenses
• First-time home purchase (up to $10,000 lifetime)
• Birth or adoption expenses (up to $5,000)
• Qualified medical expenses (exceeding 7.5% of AGI)
• Health insurance premiums (if unemployed)
• Disability
• Death (distributed to beneficiary)

These exceptions eliminate the penalty, but withdrawals are still subject to ordinary income tax.

The kiddie tax consideration

If your child has significant investment income before age 18, the "kiddie tax" may apply, taxing their unearned income at the parents' tax rate.

For Trump Accounts:

• Investment growth inside the account is not subject to kiddie tax (it's tax-deferred)
• Only applies if withdrawals somehow occurred (which is prohibited before 18 except in cases of death)

For comparison:

• Custodial accounts (UGMA/UTMA) are subject to the kiddie tax annually

This makes Trump Accounts more tax-efficient during the growth period.

Tax reporting you need to track

What the custodian reports

The financial institution holding the Trump Account will send:

Form 5498 (or equivalent):

• Reports contributions made during the year
• Sent to the IRS and the account holder
• Due by May 31

Annual statements:

• Account balance
• Investment performance
• Fees charged

What you must track personally

Keep detailed records of:

After-tax contributions (for basis calculation):

• Who contributed
• When they contributed
• How much they contributed

Employer contributions (do not create a basis):

• Annual amounts
• Documentation from the employer

Government or charity contributions (do not create a basis):

• Source and amount

Why it matters: When your child begins taking withdrawals at age 18+, they’ll need this information to report taxes accurately and avoid being taxed twice on after-tax contributions.

Strategic tax planning opportunities

Roth conversion at age 18

The strategy: When the child turns 18, convert the Trump Account to a Roth IRA immediately.

Advantages:

• Pay taxes once at age 18 (likely at a low rate if the child has little income)
• All future growth is tax-free
• Withdrawals after age 59 are tax-free
• No required minimum distributions in retirement

This is one of the most powerful tax strategies available.

Coordination with other accounts

Trump Accounts don't affect:

• Your IRA contribution limits
• Your 401(k) contribution limits
• 529 plan contributions
• Health Savings Account contributions

You can contribute to all of these in the same year.

Key tax takeaways

• No immediate tax benefit for individuals contributing their own money
• Employer contributions are TAX-FREE to employees – one of the best benefits available
• Growth is tax-deferred – no annual taxes during the accumulation period
• Withdrawals are NEVER tax-free (unlike 529s for education or Roth IRAs in retirement)
• Track your tax basis meticulously – it determines what's taxable later
• The $2,500 employer limit is PER EMPLOYEE, not per child
• Grandchildren must be dependents for employer contributions to qualify
• Roth conversion at age 18 is a powerful strategy to avoid future taxes
• State tax treatment varies – check your state's rules

Coming up next

Article 4: Age 18 and Beyond – Accessing Your Money

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