Put $5,000 a Year Into a Trump Account for Your Grandson, and It Could Grow to $4 Million — But Watch the Tax Trap

Quick Read

• If a grandparent contributes $5,000 a year to a child's Trump Account for 18 years, the balance could reach about $170,000, and then grow to roughly $4 million by age 65 if it earns 7% annually.

• The tax catch: the $90,000 contributed can be withdrawn tax free, but the roughly $80,000 in gains is taxed as ordinary income, plus a 10% penalty before age 59 and a half unless an exception applies.

• For college savings, a 529 plan has the tax advantage. The Trump Account stands out because it starts the retirement clock at birth and does not require the child to have earned income.

A grandparent who wants to give a grandchild a financial boost now has a new option. Trump Accounts, the investment accounts Congress created for every American child, began accepting contributions in July, and more than 6 million children were enrolled by early summer. Contributions can come from a parent, grandparent, aunt, employer or other eligible source.

The headline claim that a few thousand dollars a year can eventually become millions is not hype. The math works. What gets less attention is the tax bill that arrives later. Here is a look at both sides of the equation for a grandparent contributing the maximum allowed amount.

How $5,000 a year can add up

Total contributions to a child's Trump Account from all sources are limited to $5,000 a year, and an employer's share cannot exceed $2,500. Children born in the covered birth years also receive a one-time $1,000 government deposit that does not count toward the annual limit.

Consider a grandmother who contributes the full $5,000 each year from birth until age 18. That adds up to $90,000 of her own money. Before age 18, family contributions can only be invested in low-cost U.S. stock index funds, so assume a 7% annual return, slightly below the long-term performance of the S&P 500. By age 18, the account would hold about $170,000. The one-time $1,000 government contribution, left untouched for the same period, would grow to around $3,400.

And that is where the headline figure comes from. If the grandchild never adds another dollar and the $170,000 remains invested at 7% until age 65, it would grow to about $4 million. No one can guarantee 7% returns for 65 years, and $4 million decades from now will not buy what it buys today. Still, the basic idea is sound: money that starts compounding at birth has far more time to grow than money that starts at 18.

The tax downside

This is the part missing from the sales pitch. The grandmother gets no tax deduction for the $5,000 contribution because it is made with after-tax dollars. Once the child turns 18, the account converts to a traditional IRA, and the usual traditional IRA rules apply.

That means the $90,000 of contributions can be withdrawn tax free, while the roughly $80,000 of growth is taxed as ordinary income when withdrawn, rather than at the lower capital gains rates that would apply to the same stock fund in a regular brokerage account. Withdraw the money before age 59 and a half, and the growth is also subject to a 10% penalty unless an exception applies, such as qualified college expenses or a first home. For a child, the kiddie tax rules could also apply a parent's tax rate to that income.

The same tax treatment would apply to the $4 million balance. By age 65, nearly all of it would be investment growth, and that growth would be taxed as ordinary income when taken out. A retiree withdrawing $160,000 a year from the account would owe income tax on most of that amount.

How it stacks up against a 529

If the same $5,000 a year were placed into a 529 plan and earned the same 7%, it would also grow to about $170,000. If used for college, the $80,000 in growth would never be taxed. A 529 also allows a grandparent to front-load up to five years' worth of gifts at once.

What a 529 cannot do is keep compounding as a retirement account for 47 more years. That said, up to $35,000 of leftover 529 money can now be rolled into a child's Roth IRA. A custodial Roth IRA, another account often suggested for children, requires the child to have earned income. A Trump Account does not.

Which account makes sense

If the goal is college savings, the 529 has the clear tax advantage. If the money is meant to stay invested for decades, the Trump Account offers something no other child-focused account does: it begins retirement saving at birth.

The $5,000 annual contribution is also well below the federal gift tax exclusion, which allows anyone to give another person $19,000 a year in 2026 without filing a gift tax return, rising to $20,000 in 2027. That means a grandparent could fund both a Trump Account and a 529 for the same grandchild in the same year without filing a form.

The bottom line

A grandparent who puts $5,000 a year into a grandchild's Trump Account for 18 years could leave an 18-year-old with about $170,000, and if that money then compounds at 7% it could reach roughly $4 million by age 65. Just remember what is being given: $90,000 that can come back tax free, and gains that the IRS taxes as ordinary income when withdrawn. For college, the 529 is the better choice. For money you want your grandson to still have decades later, this account has the edge.