+1 on the Lincoln log idea
+1 on adding a gondola
+1 on gateman
+1 on more track
Also think about getting him a subscription to O Gauge Railroading Magazine, or a few old issues for future inspiration. I received a few of these when I was growing up (in the 1990s) and remember looking through them to get ideas, read through the advertisements, see different products, and to read about different topics such as wiring that didn't make sense then, but over time it helped me learn that facet of the hobby.
As far as other things to complement his new set, consider adding some of their favorite characters (example Mickey Mouse, Ninja Turtles, Paw Patrol, etc) for passengers/engineers/damsels in distress/conductors, etc:
Also consider the Lionel Barrel Loader accessory. It is a fun accessory, easy to use, isn't complicated, and is pretty tough. It does require AC voltage to vibrate, so he may need a different transformer than the wall wart included in the set. An additional small transformer could be had for a small amount of money to drive this accessory and others.
Another classic accessory is the Lionel Milk car. Always fun and generally easy to navigate for a 5 year old.
To use the milk car, you will need one of these fastrack operating tracks, which allow you to remotely control the operating car and also uncouple:
If you have an operating track, you may as well get one of these dump cars too.
I forgot to mention the logging cars, lumber loaders, sawmills, etc. As you can see, it's a slippery slope!!!