Give Your Grandson $5,000 a Year in a Trump Account and He Could Retire With $4 Million. Here’s the Tax Catch.

A grandmother who wants to give a grandchild a head start has a new place to put the money. Trump Accounts, the investment accounts Congress created last year for every American child, opened to contributions in July, and more than 6 million children were enrolled by early summer. Anyone can add to one: a parent, a grandparent, an aunt, an employer.

The pitch you have probably heard is that a few thousand dollars a year can turn into millions. The arithmetic behind that is real. So is the tax bill at the end of it, which gets far less attention. Here is the math on both, for a grandparent who puts in the most the law allows.

What $5,000 a year becomes

The total going into a child’s Trump Account from all sources is capped at $5,000 a year, and an employer’s share of that is capped at $2,500. Children born from 2025 through 2028 also get a one-time $1,000 deposit from the government, which does not count against the cap.

Take a grandmother who puts in the full $5,000 every year from birth to 18. That is $90,000 of her money. Before the child turns 18 a family’s contributions can only go into low-cost U.S. stock index funds, so assume the account earns 7% a year, a little under the long-run return of the S&P 500. At 18 the account holds about $170,000. The $1,000 government deposit, left alone for the same 18 years, grows to about $3,400.

Now the number in the headline. If the grandchild never adds a dollar and leaves that $170,000 invested at the same 7% until 65, it becomes about $4 million. No one can promise 7% for 65 years, and $4 million in 2091 will not buy what it buys today. But the mechanism is sound: money that starts compounding at birth gets 47 more years than money that starts at 18, and those years do most of the work.

The tax catch

Here is the part the pitch skips. The grandmother gets no deduction for her $5,000. It goes in after tax. In the year the child turns 18, the account becomes a traditional IRA, and traditional IRA rules take over.

That means her $90,000 of contributions comes back out tax free, and the $80,000 of growth is taxed as ordinary income when it is withdrawn, not at the lower capital gains rates the same index fund would get in a regular brokerage account. Take the money before age 59 and a half and there is a 10% penalty on the growth as well, $8,000 on that $80,000, unless the withdrawal fits an exception such as college costs or a first home. For a teenager, the kiddie tax rules can also apply a parent’s tax rate to that income.

The same applies to the $4 million. By 65, nearly all of it is growth, and every dollar of growth is ordinary income when it comes out. A retiree drawing $160,000 a year from that account would be paying income tax on almost all of it.

How it compares with a 529

Put the same $5,000 a year in a 529 plan at the same 7% and it reaches the same $170,000. If it pays for college, the $80,000 of growth is never taxed at all. A 529 also lets a grandparent front-load five years of gifts at once.

What the 529 cannot do is become a retirement account that compounds for 47 more years, although up to $35,000 of leftover 529 money can now be rolled into the child’s Roth IRA. And a custodial Roth IRA, the other account people suggest for children, requires the child to have earned income. A Trump Account does not.

Which one to use

If the money is for college, the 529 wins on taxes and it is not close. If the money is meant to be left alone for decades, the Trump Account does something no other account for a child does: it starts the retirement clock at birth.

A grandparent’s $5,000 is well inside the $19,000 a year anyone can give another person in 2026 without filing a gift tax return, and that figure rises to $20,000 in 2027. So you can fund the Trump Account and a 529 for the same grandchild in the same year and never file a form.

The bottom line

A grandparent who puts $5,000 a year into a grandchild’s Trump Account for 18 years hands an 18-year-old about $170,000, and if it is left alone at 7% it is about $4 million at 65. Just know what you are giving: $90,000 that comes back tax free, and growth the IRS taxes as ordinary income whenever it comes out. For college money, use the 529. For money you want your grandson to still have at 65, this is the account.

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