Trump Accounts, another savings vehicle available to Americans, is now up and running and ready for use. Given its political tenor, many have steered clear or are confused as to its purpose. A client asked about them this week and as with anything available to investors, it’s worth understanding better before moving forward

According to the New York Times, more than 7 million Trump Accounts have been opened. There are policies in place now where hospitals help open them for newborns, but for Americans with older children, the account opening process has been far slower.

Trump accounts (known also by their tax code 530A) are another tax advantaged savings vehicle (joining the ranks of 529s and IRAs). In fact, some have referred to them as a cross between and IRA and a 529 savings account.

The main “hook” with Trump accounts is for children born between 2025 and 2028, the government is putting in a seed deposit of $1,000. Many philanthropists, such as Michael Dell, are also making contributions for certain children (born between 2016 and 2024 and live in a zip code where median income is below $150,000). Some employers are also making deposits as another form of employee benefit.

Trump accounts are limited to $5,000 in contributions per year and are only for children under 18 (but they can be funded by parents, guardians, and other adults). Employers can put in $2,500 but that counts towards the cap. Contributions are not tax deductible for individuals. The funds are invested in low-cost index funds and are originally opened at Treasury. However, you should be able to roll them over to be custodied by brokerage firms (Vanguard, Fidelity, etc) once established. The money is largely locked up until age 18 with very few “emergency” loopholes for withdrawals. If withdrawals are taken, a 10% penalty and taxes will apply.

Trump accounts are focused on closing the retirement gap and as a result, turn into an IRA at age 18 and are then subject to the same rules as those accounts. There is potential for these accounts to be meaningful – if they are fully funded and left alone. As an example, if $5,000 is put in annually from birth, the account could be worth $$191,000 (at 6% growth) at age 18. If the account was moved to an IRA at that time and left as-is until age 60, it could be worth more than $2.2 million (at same growth rate).

The answer to “are Trump accounts right for me and the kids in my life” will depend on your circumstances – objectives, other accounts in place, kid’s ages, your free cash flow to name a few. The $1,000 seed deposit for certain ages (as well as employers making contributions) is a great incentive and one without much downside. However, if you do not qualify for any contributions made by others and do not have excess cash for these deposits, or have a focus on 529 for education versus retirement, it may be worth sticking with your current plan. Overall, these are tools to be evaluated and its advisable you work closely with your advisors to consider if they are right for you.