Under the multitrillion-dollar tax and spending bill signed by President Donald Trump in July, the federal government will contribute $1,000 to accounts set up for every American baby born in the next few years. 

The initiative got a boost on Dec. 2 when billionaires Michael and Susan Dell announced a $6.25 billion gift to seed accounts for millions of older children as well. Other big names in business and finance, including Bridgewater Associates founder Ray Dalio and BlackRock Inc., soon followed with smaller pledges of their own.

Lawmakers significantly scaled back the flexibility and tax benefits of the program since the initial proposal. While the accounts could serve as a springboard for long-term savings, there are other investment vehicles, especially 529 plans, that offer greater tax advantages.

Here’s how the accounts are supposed to work and how the new infusion of money might affect the program.

How will Trump accounts work?

For each account, annual contributions would be capped at $5,000, an amount that would be adjusted for inflation. The idea is for parents, relatives and even the employers of caregivers to pitch in money over time. The federal government, as well as state, local or tribal governments, could also contribute and aren’t subject to the cap.

The accounts would be locked up until the child turns 18. At that point, Trump accounts essentially become individual retirement accounts, which can be used penalty-free for certain expenses such as higher education or first-time home purchases. 

Only one account is allowed per person. The US Treasury will issue regulations requiring the funds be invested in mutual or exchange-traded index funds (ETFs) that “primarily” hold US stocks. Funds must charge low fees and not use leverage, according to the law signed in July.

Another exception to the contribution limit applies to nonprofits, including 501(c)(3) and 501(c)(4) organizations, which could give to recipients based on where they live. 

Parents, relatives, employers or philanthropists can contribute to a designated recipient’s Trump account through the year they turn 17. The Internal Revenue Service has said parents will be allowed to start contributing on behalf of children starting on July 4, 2026. 

Also, through a pilot program, the US government would contribute $1,000 to accounts for babies born from the beginning of 2025 through the end of 2028. Caregivers will be able to sign up children for an account through an online portal administered by the IRS.

What’s the significance of the contributions by business leaders? 

The commitments from corporations and well-heeled donors demonstrate how companies and business leaders are eager to demonstrate public support for a program that Trump views as part of his presidential legacy.

Dalio said his foundation would donate $250 each to roughly 300,000 “Trump accounts” for children in Connecticut. BlackRock said it would match the federal government’s contributions to the accounts for employees’ children, seeding them with $1,000 each.

Those pledges follow the Dells’ announcement in early December of a $6.25 billion gift aimed at seeding accounts for 25 million American children age 10 and under who were too old to be eligible for the initial government funding. The donation targets kids living in ZIP Codes with median incomes below $150,000.

Each eligible account would receive $250 from the Dells. While that amount is unlikely to grow into a significant nest egg even over a couple decades, Michael Dell, founder of Dell Technologies Inc., said when he disclosed the gift that he hoped to inspire others to give as well. 

What will beneficiaries be able to do with their money? 

Trump accounts can’t be touched until age 18. At that point, they’re essentially treated like traditional individual retirement accounts. As with IRAs, money can be withdrawn early for certain qualified expenses, including higher education, up to $10,000 toward first-time home purchases and $5,000 per child for birth or adoption expenses. Other distributions trigger a 10% penalty.

What are the tax advantages of Trump accounts?  

The accounts grow tax-free, and wouldn’t be taxed until money is withdrawn. Those taxes are complicated, and the US Treasury hasn’t yet issued rules on how exactly they will work. The law says recipients don’t pay taxes on any post-tax contributions to their accounts, such as those from parents and relatives. But any gains or tax-free contributions from government, philanthropists or employers will be taxed like ordinary income upon withdrawal. On top of that, beneficiaries would also face the 10% IRA withdrawal penalty if money is used for non-qualifying expenses. 

What changed about the proposal before it became law in July? 

Lawmakers tweaked the Trump accounts so that distributions will be taxed as ordinary income. Early versions of the bill said distributions would be taxed at long-term capital gains rates, which are much lower than those on ordinary income. The accounts also were changed so that they follow IRA withdrawal rules, meaning a recipient’s small business startup costs no longer qualify for penalty-free distributions.

How would Trump accounts compare with 529 college savings plans?

Trump accounts have far fewer tax benefits than 529 college savings plans, which also have far higher contribution limits. 

With a 529 plan, withdrawals are tax-free for qualified educational expenses, and contributions are often eligible for state income tax deductions. Trump account holders would still pay taxes on withdrawals. 

How much would the plan cost the federal government?  

The Trump accounts program will cost about $15 billion over the next decade, according to the Congressional Budget Office, a tiny fraction of the overall tax and spending package approved in July.

Where did the idea come from? What do supporters and skeptics say?

An idea for government-funded “baby bonds” was first proposed by economist Darrick Hamilton, a professor at the New School for Social Research in New York, as a way to help poor Americans build assets and narrow the racial wealth gap. Several states, including Connecticut, have set up baby bond programs or are in the process of doing so. Hamilton has been skeptical of Trump accounts, calling them an idea to “address wealth inequality on the cheap.” 

One impetus for the overall approach appears to have come from Kevin Hassett, director of the White House National Economic Council, who along with economist Robert Shapiro last year began promoting the idea of accounts seeded with $1,000 for newborns. It’s a “simple solution to help people be connected to financial markets so everybody in the country shares in the wealth,” Hassett said at a presentation to the Aspen Institute in 2024.

Greg Leiserson, an economist who served in the Biden and Obama administrations, warned “tax-preferred accounts primarily benefit families that already have spare time and money, not the families that need the most help.”