If Your Baby Was Born in 2025 or Later, One Big Good Bill Has a New Benefit for Your Savings

With the high cost of living, Americans are having a hard time covering their annual expenses and saving enough for retirement. To make matters worse, Americans may need to save more than ever to live comfortably in retirement, as life expectancy increases. That’s why the sooner you start saving, the better.

President Donald Trump’s signature law, the One Big Beautiful Bill, which was passed by Congress last year, focuses mainly on temporary tax cuts in Trump’s first permanent term and passing new ones. This bill also included a provision that helps parents start saving for their children as soon as they are born.

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Trump Accounts are a new way for kids under 18 to start saving for retirement. They are basically the same as an individual retirement account (IRA), although the funds are managed by an adult, usually a parent or guardian, until the child turns 18. The goal is to harness the power of saving and compounding by giving children as much time as possible to accumulate wealth for retirement.

To be eligible for a Trump account, children must be under 18 on Dec. 31 of the year in which the parent or guardian opens the account. They must be US citizens, and each child can only have one account. Children born between Jan. 1, 2025, and Dis. 31, 2028, will receive a $1,000 government contribution to the account.

Account holders will be able to invest $5,000 per year per child in both 2026 and 2027, and the limits will increase based on income starting in 2028. Contributions do not include $1,000 from the state. Donations are made on an after-tax basis, meaning they cannot be deducted from a person’s taxable income. However, all growth will be taxed as ordinary income upon withdrawal.

Employers will also be able to contribute $2,500 to Trump accounts per year per employee. Trump accounts must be invested in funds that track a qualified US stock index that can be used and whose expenses are 0.1% or less.

Once the child turns 18, the accounts are governed by IRA rules, at least for distributions, which means withdrawals taken before age 59 1/2 are subject to a 10% early withdrawal penalty. Ordinary distributions will be taxed as ordinary income.

For parents with children born between early 2025 and late 2028, opening a Trump Account and claiming a $1,000 government contribution makes all the sense in the world, since it’s essentially free money. While investing exclusively in US stocks or commodities may not always be the best option, depending on the environment, the long-term nature of these accounts and the historical returns of US stocks are a good indicator of future returns.

Additionally, if you are a risk averse investor and want to avoid market weighting S&P 500 index, there are many safer alternatives, such as the equal-weighted S&P 500 index.

Now, parents still need to understand that there are other ways to build savings for their children that may make sense in certain situations. For example, if you are planning to save money for your child’s college account, a 529 college savings plan probably makes sense. Funds must be used for qualified educational expenses, but growth and qualified withdrawals are tax-free.

There are also other savings accounts that parents can consider for children under 18, such as a Roth IRA or a UGMA/UTMA brokerage account.

Ultimately, Trump Accounts are a good idea and offer several benefits that will help your child save, so parents and guardians should explore the option and weigh the pros and cons against the other options mentioned above.

The big catch here is that one can never start saving early. Given how big the world is, parents and guardians should let the power of time and integration work their magic early.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a policy of disclosure.

If Your Baby Was Born in 2025 or Later, One Big Big Bill Has a New Savings Benefit was first published by The Motley Fool.