The savings accounts at the center of last year's tax law are about to become real for families. Here is what you need to know before opening one.

What they are

Trump accounts are custodial retirement accounts for children under 18, created under the 2025 tax-and-spending law and governed by a new section of the tax code, according to IRS guidance. A parent or guardian manages the account until the child turns 18, after which it operates like a traditional IRA. Contributions cannot be made before July 4, 2026.

The $1,000 seed — and who gets it

The headline perk is a one-time $1,000 federal deposit, but it is limited: it goes to U.S. citizen children born between Jan. 1, 2025, and Dec. 31, 2028, and families must actively elect to receive it, per the IRS. Any child under 18 with a Social Security number can otherwise open an account. Some private money is also flowing in — the Michael and Susan Dell Foundation has pledged $250 per child for millions of children in lower- and middle-income ZIP codes — and government and charitable contributions do not count against the annual limit.

How much you can put in

Private contributions — from parents, grandparents or anyone else — are capped at $5,000 per child per year, a figure set to adjust for inflation later this decade. Employers may add up to $2,500, which counts toward that $5,000 ceiling but is excluded from the employee's taxable income.

Where the money can go

This is the part the Treasury just clarified. By law, the accounts can hold only low-cost mutual funds or ETFs that track broad U.S. stock indexes; sector-specific and leveraged funds are barred, and fund expense ratios are capped at 0.10 percent. For the launch, the Treasury designated five funds — including State Street's SPDR Portfolio S&P 500 ETF (the default), plus offerings from BlackRock and Vanguard — all with expense ratios of roughly 0.02 to 0.03 percent, InvestmentNews reported. Until account-level tools are built out, contributions default into the S&P 500 fund.

How it's taxed

The accounts are tax-deferred, not tax-free. Money you contribute with after-tax dollars is not taxed again on withdrawal, but the government seed, pre-tax employer contributions and charitable gifts are all taxed as ordinary income when withdrawn — and so are all investment gains, at ordinary rates rather than the lower long-term capital-gains rate. Keeping records of where each dollar came from will matter at tax time.

When the money comes out

Funds are generally locked until Jan. 1 of the year the child turns 18, according to Investor.gov. After that, ordinary IRA rules apply, including a 10 percent penalty on withdrawals before age 59½ — with exceptions for a first home (up to $10,000), higher education, disability and certain medical costs.

The risks and trade-offs

Financial planners flag several caveats. Because the accounts hold only stock-index funds, there is no way to shift to safer assets as the child nears 18, so a market slump at the wrong time could bite. The ordinary-income tax treatment of gains compares unfavorably with a 529 plan (tax-free for education) or a custodial brokerage account (lower capital-gains rates). And at 18, the child gains full control of what could be a sizable balance. "For eligible families, once accounts are available, there doesn't seem to be a financial downside to getting the $1,000 government funding," Adam Frank, head of wealth planning at J.P. Morgan, said in the bank's guidance — a reminder that the free seed is the easy call, even as the case for adding your own money is more nuanced.

The bottom line

For most eligible families, claiming the $1,000 (and any employer contribution) is close to a no-brainer. Beyond that, it is worth comparing the account's tax treatment against a 529 or a custodial account, and — for larger sums — talking to a tax professional before committing your own dollars.