Congress has a way of taking a relatively good idea and making it tough to like. That’s the case with the new Trump Accounts. In today’s highly-politicized world, slapping a sitting president’s name on a savings account for children was unnecessary. In the end, however, people should judge these new accounts by what they actually do, not what they are called. It’s a safe bet that the name will change in the future.
Think of a Trump Account as a “starter” retirement account for kids. Together, parents, grandparents and others can contribute up to $5,000 per year (with inflation adjustments in the future.) But, unlike other retirement plans, the child doesn’t need to have any earned income to contribute to a Trump Account.
The investment choices are very, very narrow. During their childhood years, the money can only be invested in select, low-cost stock index funds. No individual stocks and no bonds or cash. This money is invested for long-term growth.
These accounts are not flexible. The money can’t be touched before age 18. At that point, Trump Accounts turn into a regular IRA owned by the child. All the same IRA rules apply. Technically, the contributions (from most sources, except employers and charities) will be considered after-tax money, but all of the built-up investment returns will be tax-deferred money. It’s kind of like a mix of a Roth and a regular IRA, in this way.
Speaking of Roth IRAs, the child could later convert some or all of the account into a Roth IRA after age 18. That could make sense, especially while they are in a low tax bracket. Naturally, this takes careful tax planning.
Now, turning age18 does not suddenly make the money easy to spend. Withdrawals before age 59½ generally face the usual 10% early-withdrawal penalty (on the tax-deferred portion.) There are some exceptions allowed, including college costs and providing for a downpayment for a first home. But, for the most part, this is still meant to be money for retirement.
That’s why the goal matters. If you really want to help save for college, a 529 plan is probably the better first choice. If you really want to help your child have easy access to money during early adulthood, a UGMA/UTMA custodial account is likely a better fit. Trump Accounts are meant for very long-term retirement savings. And, upon deeper analysis, they aren’t necessarily better than plain-old custodial accounts.
Opening a Trump Account involves some paperwork, of course. Generally, a legal guardian or parent makes the election using IRS Form 4547 through either your IRS online account, the dedicated Trump Accounts website or filing that IRS form with your tax return. It’s not too hard, but getting started is certainly different than opening a normal investment account.
It should be mentioned that babies born from 2025 through 2028 can receive a one-time $1,000 federal contribution. You have to make the election on the IRS form. It’s literally free money, unless you count the cost of the added federal government debt!
To start, you can only open an account in one place — an account run by Robinhood. Soon, though, other custodians like Schwab, Fidelity and Vanguard will accept rollovers of Trump Accounts. This will allow people to keep things under one roof.
Yes, it’s unfortunate that Congress gave these accounts a bad name. But, try hard to not let it get in the way of looking at Trump Accounts. Let’s all just start calling them “530(A) accounts”, the actual section of the tax code that brought them into existence.