Trump Accounts for Kids: The Risk to Know Before Opening One

Trump accounts, formally known as 530A accounts, are new savings vehicles for children under 18 that become available starting July 4, and one key restriction sets them apart from a typical retirement account: until the child turns 18, the money can only go into U.S. stocks, with no bonds and no diversification allowed.

A Rule Built on a Shaky Assumption

The design assumes stocks always win over long stretches of time. History says otherwise. Since the mid-1920s, U.S. stocks have indeed beaten bonds by a wide margin, averaging 5.5 percentage points more per year on a total return basis. But that run is an outlier, not the norm, according to data compiled by Edward McQuarrie, an emeritus professor at Santa Clara University. For roughly the first two thirds of American history, stocks and bonds delivered similar results.

What Fifty Year Stretches Reveal

McQuarrie's research breaks U.S. financial history into three rough segments and looks at every 50 year period within each. In the earliest third, stocks never beat bonds over any 50 year stretch. In the middle third, stocks won roughly half the time. Only in the most recent third did stocks come out ahead in every single 50 year period. That pattern undercuts the idea that time alone guarantees stocks will outperform, a notion the 530A structure leans on heavily.

How a Blended Portfolio Stacks Up

Even during the modern stretch when equities have dominated, a mixed portfolio has held its own. An annually rebalanced allocation of 60% in the S&P 500 and 40% in long term U.S. Treasurys produced an average annualized gain of 9.1% over all 10 year periods since 1926. A portfolio fully invested in stocks returned 10.7% over the same stretch. The gap is real, but modest, especially considering this comparison covers one of the most favorable periods for stocks in recorded history.

Eligibility and What Families Should Weigh

The accounts are aimed at children under 18, and once the child reaches adulthood, presumably more flexible investment choices open up. Until then, families have no say in adding bonds or other assets to smooth out the ride. That matters because a downturn in U.S. equities during the years just before a child turns 18 could leave the account worth less than a more balanced approach would have produced, with no way to hedge against it inside the account itself.

Does an All Stock Mandate Make Sense for a Child's Account?

The IRS and Treasury have laid out mechanics for opening these accounts and directing the money, but the underlying investment rule remains fixed by design, not by choice. Whether that rigidity proves costly depends entirely on how U.S. stocks perform during whatever 18 year window a given child happens to hold the account. Given how uneven stock performance has been across different eras, that outcome is far from certain.