The Tax Catch: When a Trump Account Loses to a Plain Brokerage Account

A tax-deferred account sounds like a gift. Many people file it next to "tax-free" and move on. They are not the same. Deferred means the bill comes later, and the question is how large it is when it arrives. This chapter runs the numbers on one example and shows when the answer flips.

How does the Trump account tax your money?

The IRS says that after the growth years, the account follows traditional IRA rules. Put simply:

• The part you put in from your own after-tax money comes out tax-free. This part is called basis.
• Every other dollar is taxed as ordinary income. That includes all the growth.
• The federal $1,000 deposit and employer money create no basis. They are taxed too.
• Each withdrawal is part basis and part taxable, in the same proportion as the whole account.

Ordinary income is taxed at the same rates as wages. Our chapter on turning 18 covers when money can come out.

How does a plain account tax the same growth?

A plain account in a child's name (a custodial brokerage account) has no special tax label. You pay tax on dividends each year. When you sell, a gain on something held over a year is taxed at a long-term gains rate. For tax year 2025, the IRS lists those rates as 0%, 15% and 20%, depending on income. The 0% rate covered taxable income up to $48,350 for a single filer.

So the same dollar of growth can face a different rate in each account. That is the whole catch.

What does $25,000 look like in each account?

All numbers here are made up. Put $25,000 in at birth. It grows 7% a year for 18 years in the same broad index fund. It reaches $84,498.31, which is $59,498.31 of growth.

The plain account keeps $5,354.84 more. The table treats the plain account as untaxed until the end. That is generous to it, so here is a more careful version. Say 1.5% of each year's return is dividends. You pay 15% on those every year and reinvest the rest. The plain account then ends with $74,493.93, after $8,734.22 of tax over the 18 years. It still keeps $4,275.21 more than the Trump account.

When does the Trump account win?

The answer depends on two rates. Here is the same $25,000 example with different rates.

A negative number means the Trump account wins. Two things stand out. When the Trump account's rate is lower than the gains rate, it wins. And when the child's gains qualify for the 0% rate, the plain account wins by a lot.

Ordinary rates come in steps, starting low. A young adult with little other income may pay a low rate on the first dollars withdrawn. A 24% flat rate is a cautious guess, not a prediction. Taking money out over several years can keep more of it in lower steps. The same is true for gains in a plain account. This is why your own numbers matter more than any example.

When does the catch not apply?

• Mostly free money. If the account holds mostly the $1,000 federal deposit or employer money, you paid nothing for it. Even a taxed gift is still a gift.
• Small balances. The tax gap is small when the balance is small.
• Nothing better is available. A young child with no paycheck cannot use a Roth IRA. For that child the choice is the Trump account or a taxable account.
• A low rate at withdrawal. The table shows the 12% case.

The trap is largest for large after-tax gifts from the family. That is also where most parents plan to put the most money. Our chapter on Trump account or 529 shows why a 529 may suit college money better.

What else makes this harder?

• Blended money. An account with your after-tax gifts, employer money and the federal deposit mixes taxed and untaxed parts. The IRS says to split each withdrawal by proportion. Keep your own record of what you put in.
• State tax. Some states may tax the account differently. See the chapter on state taxes.
• Less control. In a plain account you can sell winners in a low-income year. In a Trump account the money stays locked until the child is 18.

What should you do?

1. Take the free $1,000 and any employer money.
2. Before adding your own money, compare it with a 529 or a plain account for your goal.
3. Keep a log of every dollar you put in from your own pocket.
4. If you do withdraw, ask a tax professional to model withdrawing over several years.

Limits of this chapter.

• The growth rate, dividend share and tax rates are made up, and ignore the tax on a child's investment income at young ages and state tax.
• The 2025 gains rates are the latest the IRS page listed when read. Check the current year.
• This is general information, not tax advice.