Uncle Sam’s $1K Baby Bonus Comes With Hidden Tax Strings
Congress just gave newborns a $1K head start on investing — but the fine print is messy. The new custodial IRAs — nicknamed Trump accounts — launched this tax season, and Treasury Secretary Scott Bessent says about 600K families have already signed up. The accounts grow tax deferred but come with strict rules and limited investment options, and many advisers say parents should think twice before adding their own money.
- Beyond the federal $1K seed, employers can contribute up to $2.5K per year and family members up to $5K annually until age 18.
- Companies like JPMorgan ChaseJPM, Charles SchwabSCHW, and IBMIBM are already planning to match deposits for employees’ kids.
The tax headache: Here’s the catch — withdrawals use a pro-rata formula that treats the government’s $1K seed as earnings, so if you add $10K and it grows $4K, about one-third of every withdrawal is taxable regardless of purpose. Ian Berger at Ed Slott & Co. says you can’t cherry-pick contributions like a Roth IRA, and early withdrawals usually carry a 10% penalty, while Gregory Leiserson at New York University’s Tax Law Center notes a plain brokerage account may work better. In other words, the free starter money is simple — the exit math isn’t.