Tax Tip #257

Under the new legislation, parents of U.S. citizens born between December 31, 2024 and January 1, 2029 could receive a $1,000 government deposit into a new type of child savings account—with no income limits. Parents may contribute up to $5,000/year (inflation-adjusted after 2027), and funds grow tax-deferred. Withdrawals after age 18 can be used for college, a first home, or starting a business. These accounts function like IRAs (not Roth IRAs) for the exclusive benefit of individuals under 18.

Contributions can only be made in calendar years before the beneficiary turns 18. The accounts are eligible for contributions, which will not be included in the employee’s income. Distributions are taxed at long-term capital gains rates if used for qualifying purposes, otherwise, distributions are taxed at ordinary income and subject to 10% penalty.

Beneficiaries may withdraw half the account at age 18 for qualifying expenses, with the rest to be withdrawn at age 25. Any remaining balance becomes taxable at age 31, and nonqualified withdrawals are taxed as income plus a 10 percent penalty.

While more tax-efficient than a standard brokerage account due to gain deferral, these accounts are less favorable than 529 plans, which allow tax-free withdrawals for qualified education expenses.

Have questions about the Big Beautiful Bill? Contact a team member for more information.