The Fourth of July was marked by fireworks, celebrations, and remembrance for the 250th anniversary of the founding of the United States of America. This year, the 4th also brought the launch of a new federally-created savings account for kids called the “Trump Account”.

First, the basics. A Trump Account is a custodial retirement investment account for newborns and children up to the age of 18. Parents can open an account for their child, and up to $5,000 per year can be deposited into the account. Funds in the Trump Account must be invested in one of a handful of government-selected low-cost index funds. There is currently only one investment option, but the U.S. Department of the Treasury has announced 4 more funds to be added in the upcoming months.

In general, withdrawals aren’t permitted until the beneficiary reaches age 18. Once the child turns 18, the custodial Trump Account becomes very similar to a Traditional IRA account in terms of tax rules, except for some qualified exceptions like higher education expenses or a first-time home purchase.

As an incentive, eligible U.S. citizens born between 2025-2028 receive a one-time, $1,000 contribution from the government. In addition, the Michael and Susan Dell Foundation will contribute $250 to any Trump Account opened for a child age 10 or younger, provided that they live in a ZIP code where the median family income is less than $150,000. That includes most zip codes in and around Lake Tahoe.

Should everyone rush to open a Trump account for their child? Not necessarily. The advantages of the Trump Accounts are greater for some situations than they are for others. While the accounts likely make sense for some children, others might be better served by a 529 plan or a Roth IRA.

If your child is eligible for free contributions from either the federal government, the Dell Foundation or both, opening the account is a no-brainer. Even if you never add money to it, your child is getting free money invested for their future. Run, don’t walk, and open their account right away! Once you have the free money invested for your child, you can figure out whether additional contributions are your best option.

If there is no free money coming, the decision becomes more nuanced. Trump Accounts don’t avoid taxation the way Roth or 529 accounts can. Because of this, other types of accounts may have greater tax benefit for your particular situation.

For families whose top priority is saving for post-secondary education, a 529 account may be more advantageous, since you aren’t taxed on withdrawals if they are used for qualified educational expenses. Plus, leftover funds in the account can potentially be rolled into a Roth IRA tax-free up to a total of $35,000, although some guidelines apply. In cases where your child is old enough to work and has some income, directly saving into a Roth IRA could be your best option.

There’s another useful way that you can use a Trump Account to build savings for your child’s future. Unlike Traditional and Roth IRAs, you are allowed to contribute to a Trump Account even if your child has no earned income. You can contribute up to $5,000 per year, let it grow, and then do a series of small Roth conversions once your child is at least 18 and is earning income. For most young adults aged 18-22, the conversion could be done in either the 10% or 12% tax bracket—a very low-tax way to have a sizeable Roth account at a relatively young age, assuming future tax rates remain similar.

In my opinion, the best part of the Trump Accounts is that they may convince more families to start saving money earlier. I support that 100%. But be aware that there is no special tax treatment that makes these accounts inherently better than some of the other saving alternatives out there. Your personal family circumstances will determine whether or not a Trump Account is better than those other options.

However you choose to build your child’s future wealth, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.