You’ve probably read about the new Trump Accounts for kids.
But a lot of people are confused about whether their child actually qualifies for the new accounts. Here’s a breakdown.
What is the purpose of the new Trump Accounts?
Trump Accounts were created to encourage early savings and investing for children. By starting to save early in a child’s life, the funds begin compounding over time and can grow on a tax-deferred basis, jump-starting a future nest egg the child can use for retirement, buying a house, or other goals.
Who can open a Trump Account?
Trump Accounts can be opened for kids with a Social Security number up to the calendar year they turn 18. Accounts are in the name of the child, with a parent, guardian or other authorized adult serving as custodian. At age 18, the accounts are automatically converted to IRAs owned by the kids. All accounts must be established through the U.S. Treasury and only one account is permitted per child.
I thought Trump Accounts were only for newborns and infants?
No, as detailed above, Trump Accounts can be opened for minors up to January 1 of the calendar year they turn 18.
What about receiving free money from the Government?
The free money you have heard about does refer to younger children only.
The U.S. Government will make a one-time contribution of $1,000 to each account opened for U.S. citizen children born between 1/1/25–12/31/28. The adult account custodian must claim the funds on a specific tax form.
Older kids can open Trump Accounts but are not entitled to receive the free $1,000. However, their accounts can receive contributions from parents and family (see below) as well as from other parties like employers or charities.
What about other contributions?
Trump Accounts can accept other contributions – for example, from parents or family members – up to $5,000 per child per year. The free funds from the Government or other charitable institutions do not count toward that total. Parental contributions are not tax-deductible.
Trump Accounts can also accept employer contributions up to $2,500 per employee. Contributions must cease by January 1 of the calendar year the child turns 18.
What’s the upside to Trump Accounts?
Hey, any savings is a good thing, right?
One of the cardinal rules of investing is to start saving early and let the money compound. Trump Accounts give people a fairly easy way to do that, and the free Government money is a slam dunk. Another advantage? Trump Accounts are limited to investing in low-cost stock index funds only, so expenses stay low.
If your child is eligible for free money from the Government or other parties, you should sign up for an account and claim it, even if you decide not to make further contributions of your own. After all, free money is free money!
What’s the downside to Trump Accounts?
Depending on your situation and goals, Trump Accounts may not be the best choice for your child. As you know, there are other savings options available like College 529 plans, Roth IRAs, and Minor’s brokerage accounts (UTMA/UGMA accounts). These may work better for you and your child, and offer more meaningful tax or contribution benefits.
Trump Accounts are not a good option if the child may need to withdraw and spend the money before age 18. These accounts are intended for long-term savings and investment only. Distributions are actually prohibited during the growth period (up to January 1 of the calendar year the child turns 18).
Growth on contributions is tax-deferred and not tax-free, just like with an IRA. That means taxes on growth are not erased. They are merely postponed. That’s potentially less advantageous than the tax treatment available with other plans.
The entire account balance belongs to the child once he or she turns 18. In fact, the account actually converts to an IRA account for the child on January 1 of the year they turn 18. IRA rules kick in after that date. That includes all the taxes and penalties that would normally apply to an IRA.
Kids being kids, that means they are free to withdraw all the funds and spend the money on something stupid if they want. Parents, that gives you 18 years to teach them why that’s a bad idea!
The Takeaway
For more information on Trump accounts, or to download an application, visit TrumpAccount.com.