Expert claims Trump Accounts aren't really tax-free — despite the President saying so

While in his State of the Union address, President Donald Trump touted his "Trump Accounts" as something special and totally tax-free, but the claims aren't entirely true. The president claimed that through the scheme, a parent could start with nothing and earn a $100,000 for their child by the time they turn 18. While the accounts created under the administration's signature "big beautiful bill" function largely as individual retirement accounts, they are subject to some taxes.

In his speech, Trump paraded the scheme as “tax-free investment accounts for every American child," and "something that’s so special, has taken off and gone through the roof,” Fortune reported As per the official website, onsaying ce an account is set up, babies born in 2025 through 2028 are eligible to receive a one-time $1,000 contribution from the Treasury, which will grow year-over-year as per the average S&P 500 growth. “With modest additional contributions, these young people’s accounts could grow to over $100,000 or more” by age 18, the president added.

However, his claim that these accounts are tax-free isn't entirely true. “There’s not really any sense in which Trump accounts are tax-free,” Ben Henry-Moreland, senior financial planning executive for advisor platform Kitces.com, told CNBC. “People pay tax on the dollars that they contribute to the account, and they pay tax on any additional growth when they withdraw from the account," he added. 

The reality is that Trump Accounts are not entirely tax exempt, and the rules for Trump accounts are complicated. The way it works is that the contributions made by parents, guardians, beneficiaries, or others are after-tax dollars, so if those deposits are tracked, they should be tax-exempt when withdrawn, according to experts. However, the Treasury's $1,000 seed funding and the charitable gifts from organizations are before tax, and those contributions will be subject to income tax on withdrawal.  

“It’s not something that is tax-free, and it’s not something that grows tax-free as it does for other retirement accounts," Dianne C. Mehany, EY private national tax leader, told Fortune. She explained that as the money grows in the accounts, the earnings will be tax-deferred, functioning like a Roth IRA; thus, the income will not be taxed like capital gains or dividends, but when the funds are withdrawn, earnings will be taxed as regular income, as per the Treasury guidance. “The child will recognize taxable income at some point in the future when they take a withdrawal from the account,” Tommy Lucas, a certified financial planner at Moisand Fitzgerald Tamayo in Orlando, told CNBC, adding that families will need to plan for that bill.

Furthermore, Trump accounts are set to launch on July 4, and some of the provisions, including taxes, may still need to be hammered out. Additionally, most of the funds can't be withdrawn for a long time as per the rules, meaning there is a lot of time for Congress to change or modify the tax rules before the withdrawals begin. 

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