(WBEN) - As part of the sprawling new tax bill that was signed into law this past weekend, newborn Americans stand to get an early boost in their savings.
The law created a new class of tax-advantaged account that comes with a pre-loaded investment of $1,000 from the US Treasury. Every child born from 2025 through the end of 2028 is eligible. Children born before 2025 are eligible for the account, but not the $1,000 investment.
It's a simple concept, but there is still a lot that parents need to know.
How Does the Account Work?
The account will not be able to be touched until the child turns 18 years old. While it is seeded with $1,000, it can take up to $5,000 per year in additional contributions from parents, and $2,500 from parents' employers. At age 18, partial withdrawals can be taken out for education, buying a first home, or starting a business. The full amount can be accessed for qualified purchases at age 25, and for any purpose at age 30.
How is it Different From a Roth IRA or 529 Savings Account?
The "Trump Account" is more of a generalized long-term savings account than the Roth IRA, which are generally for retirement savings, and the 529 plan, which are specifically for saving for education.
The Trump Accounts are less advantaged, because withdrawals can be taxed, but it does offer some flexibility for use on things other than education after the age of 18.
"This isn't something for you to raid," said Bankrate Senior Economic Analyst Mark Hamrick. "This is something for you to be able to achieve your goals over the course of your lifetime... This is not for a trip to LA."
Which Account Should I be Investing Into for My Kids?
"It will depend on your circumstances," said Michael Angelucci of Level Financial Advisors. "The 529 is still an incredible vehicle."
Angelucci and others point to the 529 plan as a best option for parents looking to save for their kids' education because there are no annual contribution limits, contributions grow tax-deferred at the federal level, and withdrawals are tax-free if used for education.
"For Many People, You should be looking at all of them," Hamrick said. "The earlier you start saving, you win the benefit of compounded returns over many years."
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