Seven million children now have a federal investment account with their name on it. The accounts already hold $1.5 billion, the paperwork comes with a brand-new tax form, and grandparents across America have one question: is this where the birthday check goes?
Short answer: it is a genuinely good spot for gifts. Longer answer: the order matters, and the 529 college account comes first. Let’s walk it.
What the accounts are
The mechanics come from the Journal’s Tax Report this weekend. Every child born from 2025 through 2028 gets a $1,000 seed deposit from the federal government. Anyone — parents, grandparents, generous aunts — can add up to $5,000 a year on top.
The money goes into one investment: an S&P 500 index fund, a fund that owns America’s 500 biggest companies. It is run by State Street (STT), with the accounts held at BNY Mellon (BK) and Robinhood (HOOD). There is no menu of funds to agonize over. The market is the menu.
Fund it steadily and the example in the report runs to roughly $160,000 by age 18. That is not a typo. That is what eighteen uninterrupted years in an index fund can do.
A thousand-dollar seed is nice. Eighteen years of nobody touching it is the actual gift.
Where the 529 still wins
Before you reroute every gift, remember the account that was already working. A 529 is a college-savings account, and many states pay you to fund one through a state tax credit. Indiana’s credit, for example, is worth up to $1,500.
A tax credit is money in your hand today. No index fund can promise that.
So the order, in most families: capture the 529 credit first, then fill the new account. Free money before compounding money.
The fine print that bites
Three trapdoors, all from the same report.
First, the kiddie tax. Once a child’s investment income passes $2,700 in a year, it gets taxed at the parents’ higher rate. These new accounts do not float above that rule.
Second, Form 5498-TA. This form tracks the account’s basis — the running record of what was put in. Lose the forms and someday somebody pays tax twice on the same dollars. File every one like it owes you money, because it does.
Third, Roth moves. The rules for moving this money into or alongside Roth retirement accounts carry traps for the improviser. This is a measure-twice corner of the tax code. Do not freelance it.
What to actually do
One: if a grandchild was born in 2025 or later, confirm the account exists and the $1,000 seed is actually in it. Seven million families signed up; the seed only grows if it is claimed.
Two: run the order. If your state pays a 529 credit, fund the 529 to the credit first. Then send gifts to the new account, up to the $5,000 yearly cap.
Three: put it on autopilot. A fixed monthly amount beats a heroic December check, and steady funding is what gets you to the $160,000 example.
Four: keep every Form 5498-TA in the family file, watch the $2,700 kiddie-tax line once the account grows, and call us before any Roth maneuver. Ten minutes of planning beats a decade of amended returns.