The U.S. government started giving babies born during President Donald Trump’s second term a US$1,000 gift on July 4, 2026. This money goes into the accounts, which are named after the president. To get the free money, the babies’ parents or guardians just have to submit the required paperwork.

I am a business school professor who studies wealth, savings and spending. Additionally, I am expecting another grandchild soon. While other members of our family are picking out decorations for the baby’s room, my task is deciphering Trump Accounts.

While these accounts clearly could help boost savings, they come with many restrictions that limit their usefulness for important expenses young Americans incur, such as paying for college and buying their first home.

IRAs for jobless babies

Trump Accounts are a traditional individual retirement account, or IRA, for children. Currently, all money deposited in these savings vehicles will be invested in State Street Bank’s SPDR Portfolio – which mirrors the S&P 500 stock index.

They will function somewhat like traditional IRAs for grownups, for which contributions can be deducted from your taxable income in the year they’re made. However, withdrawals before or after retirement are taxed.

These new accounts come with three small twists:

First, the government is kicking in $1,000 for babies born in calendar years 2025 through 2028. Congressional funding for this gift expires Sept. 30, 2034, so procrastinators have six years beyond 2028 to create an account for their kids.

Second, some states, big companies and foundations are pledging extra money to the accounts. Additional contributions from, say, a child’s grandfather, are limited to $5,000 a year; the employer of a child’s parent and charities may kick in up to $2,500 annually.

To be clear, not all recipients of this money have to be babies. For example, tech executive Michael Dell and his wife, Susan Dell, are providing $250 for the first 25 million kids under age 10 who sign up for Trump Accounts and live in middle-to-lower-income neighborhoods.

Third, to contribute to these new plans, a child does not have to earn money from working, which is required for traditional and Roth IRAs.

Many people and media outlets are comparing and contrasting 529 college savings plans and Trump Accounts, However, Congress designed these plans with different goals.

These new accounts are really not designed to help families save for college costs. Instead, they are supposed to give children an early head start on saving for their retirement.

How much they could grow

A big idea behind Trump Accounts is that a small sum can turn into a big one, if left alone in an investment account with no withdrawals for a long time.

The main website for the accounts, trumpaccounts.gov, highlights the magic of compounding. While you may be mainly familiar with compound interest, compounding refers to anything growing over time.

The website estimates if the government’s $1,000 is left untouched with no further contributions, then by the time a child with a Trump Account turns 18, it would be worth $6,000. At age 27, their account would be worth $15,000, and at age 55, it would be worth $243,000.

Many financial planners do not believe that these simulations, which assume the stock market’s value increases by more than 10% a year, are realistic – even if past performance suggests this is reasonable to expect. That quarter-million dollars turns into a bit less than $9,000 if stock prices only grow by 4% annually over the next half-century or so.

That’s why there is a disclaimer in tiny type below the eye-popping numbers. It reads: “Actual results may differ and are not guaranteed.”

Trump Accounts also have another important limitation.

The only option available at this point is a fund that owns shares in the 500 largest U.S. publicly traded companies. Currently, this means about one-fifth of this money will be invested in Nvidia, Apple, Microsoft and Amazon since they’re the most valuable publicly traded companies today. In the future, there will be other options, but like the current choice, they mirror the stock market’s overall performance.

These accounts will support and boost the value of U.S. stocks, since a growing number of people – well, children – will be putting significant sums of money into the market that won’t be easy or cost-free to withdraw.

I believe that accounts like these are needed because they’ll boost Americans’ saving rate.

In 1975, Americans were saving over 13% of their disposable income, but by 2025, it was under 4%. This reduction in the savings rate means many Americans don’t have enough to cover emergencies, pay for a child’s college education or be ready for retirement.

5 downsides

Although Trump Accounts may help boost saving, they have some downsides.

First, no money can be taken out until the child turns at least 18, even with a penalty. After that point, the accounts can be rolled into another IRA.

Second, unless the account holder is withdrawing their money to help pay for their education, to buy a home or deal with disaster recovery, any withdrawals are subject to ordinary income tax rates.

Third, while traditional IRA contributions reduce your taxable income, any contributions you, your relatives or others make to Trump accounts do not. So they are not a way to reduce your tax bill.

Fourth, at age 18, all parental oversight disappears and the child has complete control of the money. Not all parents believe their child is capable of responsibly handling large amounts of money at that age.

Last, the accounts are not opened automatically. Parents or guardians have to request an account by dealing with the IRS.

Where Trump Accounts come from

The idea for these accounts did not come out of thin air.

In 1991, social scientist Michael Sherraden wrote a book proposing Individual Development Accounts. They offered a model for today’s Trump Accounts.

His idea: Provide low-income people with some assets – especially when they were young. These accounts were designed to boost people out of poverty by helping them afford a college education, buy a home and save for retirement. A variety of Individual Development Account programs were funded as pilot projects by states and foundations.

While the scope of these experiments were limited, evaluations of those pilot programs showed that providing funds early boosted home ownership and increased participants’ savings years later. These positive outcomes made it seem worth expanding what Sherradan and his team tried on a much larger scale.

Unfortunately, it’s also clear that attaching Trump’s name to the concept is rendering it less popular than it might have otherwise been.

However, there’s a clear precedent for this. Roth IRAs, after all, are named after Sen. William Roth Jr.. Roth, a Delaware Republican, championed the creation of retirement accounts when he served in Congress. Roth IRAs are the opposite of traditional IRAs. You can deposit some of your income after paying taxes on it into a Roth IRA and then take money out tax-free later.

As for me, I still don’t know how the new baby’s room will be decorated. However, I do know that creating an account is a smart idea, since it will give this child a financial boost down the line. I’ll even kick in extra money during the account’s first year to ensure the baby gets a bigger boost.

Jay L. Zagorsky, Associate Professor of Business, Boston University

This article is republished from The Conversation under a Creative Commons license. Read the original article.