Can You Lose Money in a Trump Account? (w/Examples) + FAQs

Quick Answer: Yes. You can lose money in a Trump account for tax year 2026. The funds are invested in U.S. stock index funds, so the balance falls when the market drops. You can also lose money to the 10% early-withdrawal penalty and to ordinary income tax on the growth.

A Trump account is a new federal investment account for children under 18, created by the One Big Beautiful Bill Act signed on July 4, 2025. It works like a starter IRA: money goes in, gets invested in a stock index fund, and grows over time. The catch is that “invested in stocks” means the value can drop, and the tax rules can take a bite out of the money when it finally comes out.

The stakes are real because this account is built for the long haul. Children born in 2025 through 2028 get a one-time $1,000 from the U.S. Treasury, and families can add up to $5,000 a year. According to the White House Council of Economic Advisers, these accounts are meant to give the next generation a head start on saving. But a head start can still shrink if the market falls or if the money is pulled out the wrong way.

This article reflects federal rules as of June 2026 and covers tax year 2026. Tax law changes — confirm current figures before you file.

Here is what you will learn:

📉 The two main ways you can lose money: market drops and tax penalties
💰 How the 10% early-withdrawal penalty works, with real dollar math
🧾 Why the $1,000 seed and employer money get taxed as ordinary income
⚠️ Seven costly mistakes that quietly drain the account
🗺️ Whether your state taxes the account on top of federal tax

This guide is educational and is not a substitute for advice from a licensed tax professional for your specific situation. When real money and a child’s future are on the line, a quick check with a CPA is cheap insurance.

What a Trump Account Actually Is

A Trump account is a type of traditional IRA created for a child under age 18, defined in new Section 530A of the tax code. A traditional IRA is a retirement account where money grows without yearly tax, but is taxed when you take it out. The “Trump account” label just means it follows special rules until the child turns 18.

The account opens with an election on IRS Form 4547, Trump Account Election(s), or online at trumpaccounts.gov, with the online tool expected in mid-2026 per IRS Notice 2025-68. A parent, legal guardian, adult sibling, or grandparent — in that order — can open it. Contributions cannot start before July 4, 2026, no matter when the account is opened.

The period before the year the child turns 18 is called the growth period. During this time, special rules apply: the money can only sit in certain index funds, withdrawals are mostly blocked, and the yearly contribution cap is separate from a regular IRA. After the growth period, the account turns into a plain traditional IRA, and normal IRA rules — including the 10% early-withdrawal penalty — kick in.

Why this matters for losing money: the account is not a savings account, a CD, or anything with a guaranteed balance. It is a stock-market account. The same design that lets it grow also lets it fall, and the IRA wrapper adds tax rules that can cost money if you ignore them.

The Two Ways You Lose Money

There are two completely different ways to lose money here, and people mix them up. Understanding both is the whole point of this article.

The first way is investment loss — the market drops and your balance shrinks. This is true of any stock investment and has nothing to do with taxes. The second way is tax and penalty loss — you take money out too early or the wrong way, and the IRS taxes it and adds a penalty. This loss is avoidable if you know the rules.

Investment Loss From the Market

During the growth period, a Trump account can only be invested in a mutual fund or ETF that tracks a U.S. stock index like the S&P 500, per IRS Notice 2025-68. The fund cannot use leverage and cannot charge more than 0.10% in annual fees. Cash and money market funds are not allowed during the growth period.

Stock index funds rise and fall with the market. The S&P 500 has fallen more than 30% in a single year before, such as in 2008. If that happens the year before your child needs the money, the balance drops with it, and there is no FDIC insurance to bail you out.

The consequence is simple: a $5,000 balance can become a $3,500 balance in a bad year. The fix is time — markets have historically recovered over many years, which is why this account suits long-term goals, not short-term needs. If your child needs the money in two years, this is the wrong tool.

Tax and Penalty Loss

The second loss comes from the IRS, not the market. After the growth period, the account is a traditional IRA, so any withdrawal before age 59½ generally triggers a 10% early-withdrawal penalty under Section 72(t), plus regular income tax on the earnings.

Here is the part that surprises people: the $1,000 government seed, employer contributions, and charity gifts do not create “basis.” Basis is the after-tax money you put in, and only basis comes out tax-free. Because that seed money has no basis, every dollar of it is taxed as ordinary income when withdrawn.

The consequence is a double hit — income tax plus the 10% penalty — on a chunk of the account. A young adult who cashes out at age 19 could lose 20% to 35% of the taxable amount to the IRS. That is a self-inflicted loss the market never caused.

Worked Example: The 10% Penalty in Real Dollars

Numbers make this clear, so here is the math you can copy. Meet Maya, born in 2026. Her Trump account gets the $1,000 Treasury seed, and her parents add $3,000 a year for 18 years, totaling $54,000 in family contributions plus the $1,000 seed.

Assume the account grows to $120,000 by the year Maya turns 18 in 2044. Of that, her family’s $54,000 of contributions is basis (already-taxed money), and the $1,000 seed has no basis. The remaining $65,000 is earnings, and the $1,000 seed is also taxable, so $66,000 is taxable on a full withdrawal.

Now say Maya withdraws everything at age 19 to buy a car, with no exception applying. She owes ordinary income tax on the $66,000 taxable portion, plus a 10% penalty on that same $66,000, which is $6,600. If her income tax on that amount is roughly $9,000, her total cost is about $15,600 — money lost purely to early, unplanned withdrawal.

Had Maya waited or used an exception like qualified college expenses, the $6,600 penalty would vanish. The lesson: the market gave her $65,000 in growth, and a rushed decision handed $6,600 of it straight to the IRS.

Which Situation Applies to You?

The right answer depends on who you are and what you are trying to do. Use this to find your path.

You are a new parent of a 2025–2028 baby: focus on the $1,000 seed, the no-basis rule on that seed, and the long time horizon that smooths out market losses.
You are a grandparent or friend contributing: your gifts create basis and come out tax-free later, but they still face market risk and the 10% penalty on growth if pulled early.
You are an employee with a workplace program: your employer can add up to $2,500 a year tax-free, but that money has no basis and is fully taxed on withdrawal.
Your child needs money within a few years: this account is the wrong tool — market drops and the withdrawal lock during the growth period can trap or shrink the funds.
You live in a state with income tax: check state conformity, because some states may tax the growth even when federal rules defer it.

Three Common Scenarios

These three scenarios come up most often. Each shows the action and what it costs.

Scenario 1 — Market drop the year before college

What Happens	What It Costs You
S&P 500 falls 25% in 2043, right before withdrawal	A $100,000 balance drops to about $75,000, a $25,000 paper loss
You wait and withdraw after a recovery	The loss often reverses over time, since the funds track the broad market

Scenario 2 — Early withdrawal with no exception

What Happens	What It Costs You
Account holder withdraws $40,000 of taxable money at age 20	10% penalty of $4,000 plus ordinary income tax on the $40,000
Account holder waits until 59½ or uses an exception	The $4,000 penalty disappears; only income tax applies

Scenario 3 — Over-contributing past the $5,000 cap

What Happens	What It Costs You
Grandparents and parents together put in $7,000 in 2026	The $2,000 excess must be returned; a 6% excise tax can apply if left in
You track all contributors and stop at $5,000	No excess, no penalty, no paperwork headache

Three Named Examples

James and the market crash. James opens an account for his daughter in 2026 and invests in an S&P 500 fund. In a 2030 downturn the balance falls 30%. Because his daughter is only 4, James does nothing, and the fund recovers over the next several years. His “loss” was temporary because he had time on his side.

Priya and the early cash-out. Priya’s son turns 18 in 2043 with $80,000 in the account. He withdraws $20,000 at age 18 to start a business, with no exception. He owes income tax on the taxable share plus a $2,000 penalty on that taxable portion — a real, permanent loss caused by timing, not the market.

The Dell-style charity gift. In December 2025, Michael and Susan Dell pledged $6.25 billion to deposit $250 into millions of children’s accounts. That gift is a “qualified general contribution” with no basis, so when little Aiden eventually withdraws it, every dollar of that $250 and its growth is taxable income — a small tax cost on a free gift.

How the Money Is Taxed (Federal)

Contributions to a Trump account are not deductible, and they are not taxed when they go in, per Section 530A. The tax shows up later, when money comes out. This is the classic traditional-IRA trade: tax-deferred growth now, ordinary income tax later.

The key tax concept is basis. Family, friend, and the child’s own contributions create basis and come out tax-free. The $1,000 seed, employer money, and charity gifts have no basis, so they are fully taxed as ordinary income on withdrawal, as confirmed in IRS Notice 2025-68.

One more federal trap: a Trump account cannot be combined with the child’s other IRAs when figuring the taxable portion of a withdrawal. Its basis is tracked alone. The consequence is that you cannot blend in other IRA basis to lower the tax — the Trump account stands by itself.

A common misconception is that the account is “tax-free like a Roth.” It is not. It is a traditional IRA, so growth is taxed on the way out, and a Roth conversion is a separate, taxable step you would have to choose later.

Does Your State Tax This?

Federal law sets the rules above, but states do not automatically follow federal tax law. Some states “conform” to the federal code and some do not, so the state answer can differ from the federal answer.

In a state with no income tax — such as Texas, Florida, Washington, or Tennessee — there is no state tax on the account’s growth or withdrawals, so this concern disappears entirely. That is a complete and valuable answer: those residents face only the federal rules above.

In a state with income tax, the question is whether the state taxes IRA withdrawals and whether it follows the new Trump account rules. Many states do tax traditional IRA distributions, which means the growth and seed money could be taxed at the state level too, on top of federal tax. Because Section 530A is brand new, several states have not yet said how they will treat it, so the IRS notes that state issues are outside its guidance — check your own state’s tax agency before assuming your state mirrors the federal treatment.

The consequence of guessing wrong is an unexpected state tax bill years later. The fix is to confirm your state’s rule before relying on the account for a specific goal, and to revisit it as states issue guidance.

Effective Dates and the Sunset You Must Know

The Trump account rules apply to tax years beginning after December 31, 2025, per IRS Notice 2025-68. Contributions cannot be made before July 4, 2026. The account structure itself is permanent in the law, unlike many temporary OBBBA provisions.

The $1,000 pilot seed is temporary, though. Only children born after December 31, 2024, and before January 1, 2029, qualify for the free $1,000. A child born in 2029 or later misses the seed entirely, even if the account itself still exists.

The consequence of missing the window is losing $1,000 of free money plus all the growth it would have earned over 18 years. If you have a baby born in the 2025–2028 range, the action is clear: make the election so the seed lands in the account.

Mistakes to Avoid

Each of these quietly costs money or triggers tax.

Withdrawing before age 59½ with no exception — triggers the 10% penalty on the taxable amount, a pure loss.
Treating it like a Roth — you may expect tax-free withdrawals, then owe ordinary income tax on all the growth.
Forgetting the seed has no basis — you under-plan for tax and get a surprise bill on the $1,000 and its growth.
Letting multiple relatives over-fund past $5,000 — the excess must be removed, and a 6% excise tax can apply if it stays in.
Putting money the child needs soon into a stock fund — a market drop right before you need it locks in a real loss.
Missing the 2025–2028 birth window for the $1,000 — a baby born in 2029 loses the free seed forever.
Assuming your state follows federal rules — you may face an unexpected state tax bill on withdrawal.
Trying to add money before July 4, 2026 — contributions are rejected before that date, per IRS Notice 2025-68.
Trying to convert an existing IRA into a Trump account — not allowed; it must be opened as a Trump account from the start.

Do’s and Don’ts

Do’s

Do open the account for a 2025–2028 baby to capture the free $1,000 seed before the window closes.
Do track every contributor so the combined total stays at or under $5,000 per year and avoids excess.
Do keep records of basis so the child is not taxed on money that already counts as after-tax.
Do plan for a long horizon, since time is what protects a stock account from short-term losses.
Do check your state’s tax treatment so a state bill does not surprise you later.

Don’ts

Don’t pull money early without an exception, because the 10% penalty is avoidable money lost.
Don’t expect tax-free growth — it is a traditional IRA, not a Roth, so growth is taxed on withdrawal.
Don’t use it for near-term needs, since market drops and the growth-period lock can trap funds.
Don’t ignore the $5,000 cap across all givers, or the excess triggers tax and cleanup.
Don’t assume the $1,000 seed is permanent — it ends for children born in 2029 and later.

Pros and Cons

Pros

Free $1,000 seed for eligible 2025–2028 babies kick-starts the account at no cost.
Tax-deferred growth lets money compound without yearly tax during the growth period.
Low-cost index funds are required, capping fees at 0.10% and protecting returns.
Employer money of up to $2,500 a year can be added tax-free through a workplace program.
No earned-income requirement, so a baby can have an account funded even with no job.

Cons

Market risk means the balance can fall sharply in a downturn, since it is all stocks.
10% early-withdrawal penalty applies before age 59½ without an exception.
Seed and employer money are fully taxed on withdrawal because they create no basis.
No flexibility during the growth period — withdrawals are blocked except in narrow cases.
Not a Roth, so growth is taxed as ordinary income later, unlike a Roth IRA’s tax-free withdrawals.

What to Do Next

Take these steps in order to use the account well and avoid losing money.

Confirm eligibility — check your child has a valid Social Security number and, for the seed, was born in 2025–2028.
File IRS Form 4547 once released, or use trumpaccounts.gov in mid-2026, to open the account and elect the $1,000 seed.
Wait for July 4, 2026 before adding any family contributions, since earlier deposits are rejected.
Coordinate contributors so all gifts together stay at or under $5,000 for the year.
Keep a basis log showing which dollars are after-tax, so withdrawals are taxed correctly.
Check your state’s tax agency to learn whether the state taxes the growth.
Call a CPA if you have employer contributions, multiple givers, or plan an early withdrawal — that is when the rules get tricky and a pro saves money.

FAQs

Can you lose money in a Trump account? Yes. The funds sit in U.S. stock index funds for tax year 2026, so the balance falls when the market drops. You can also lose money to the 10% early-withdrawal penalty and to income tax on the growth.

Is a Trump account FDIC insured? No. It holds stock index funds, not bank deposits, so there is no FDIC insurance. If the market falls, the balance falls with it, and nothing guarantees the principal.

How much can you contribute to a Trump account? $5,000 per year for 2026 and 2027, indexed after 2027 per IRS Notice 2025-68. The $1,000 seed, charity gifts, and rollovers do not count toward this cap.

Is the $1,000 government seed taxed? Yes. The $1,000 pilot contribution creates no basis, so it and its growth are taxed as ordinary income when withdrawn. Only family and personal contributions come out tax-free.

When can you withdraw without penalty? At age 59½, or earlier with an exception like qualified college costs or a first home. Otherwise a 10% penalty applies on the taxable amount, plus income tax.

Is a Trump account the same as a Roth IRA? No. It is a traditional IRA, so growth is taxed when withdrawn. A Roth allows tax-free withdrawals, but a Trump account would need a separate, taxable Roth conversion to act that way.

Who can open a Trump account? A parent, guardian, adult sibling, or grandparent — in that order of priority — using IRS Form 4547 or trumpaccounts.gov. The child must be under 18 with a valid Social Security number.

When can contributions start? July 4, 2026. No contribution can be accepted before that date under Section 530A, even if the account is opened earlier in 2026.

What happens if you contribute too much? The excess must be removed. Trustees must block contributions over $5,000, and any excess left in the account can face a 6% excise tax until corrected.

Which children get the free $1,000? Children born in 2025 through 2028 who are U.S. citizens with a Social Security number. A child born in 2029 or later does not qualify for the seed.

Can the account be invested in anything besides stocks? No. During the growth period it must hold a low-fee U.S. equity index fund, with no leverage, no sector funds, and no cash or money market funds.

Does my state tax the withdrawals? It depends on your state. No-income-tax states do not tax it. Income-tax states may tax IRA withdrawals, and many have not yet clarified their treatment of this new account.

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