Trump Accounts: What Are They and How Do They Work?

Hello everyone and thank you for joining me. Today, I'd like to talk with you about Trump accounts. It's likely by now you've probably heard of them, and recently we've been receiving an uptick of questions around them. Most often something to the extent of what are they and how do they actually work?

Trump accounts are a new type of investment account that allows someone to put money away for a loved one and have the following characteristics. They're available for any child under the age of 18 regardless of earned income, and for any child born between 2025 and 2028 the government will contribute $1,000 on their behalf. Contributions made by a parent or loved one receive no tax deduction and have an annual limit of $5,000 per child. Earnings are tax deferred and at 18 transitions into an IRA owned by the child with similar rules around withdrawals and penalties as with any other IRA.

And starting early can make a huge difference. If a family with a child born during 2025 to 2028 takes $1,000 from the government and then puts away 5,000 annually until the child turns 18 with a 7% rate of return, the 91,000 of contributions made will have grown to around 185,000 by the time they turn 18 and the account turns into an IRA. And assuming no additional contributions and hopefully no withdrawals, still using that 7% return, their IRA could be worth just under 3.2 million by the time they turn 60 and get ready to begin thinking about retirement.

But as financial planners we often see things beyond the initial face value and think a few steps down the line. If the account is an IRA, it can be converted into a Roth IRA. And here's where it gets interesting. Recently, additional guidance has come out that conversions may be subject to what's called the kiddie tax rules, depending on the titling. Essentially, if conversions are made while you're financially supporting your child, they will very quickly be at your own tax rate, not your child's. With the compound growth we talked about earlier, without careful planning down the line, that could mean a lot in taxes.

So, with this wrinkle, does it mean you shouldn't plan to convert to Roth? As usual, it depends. And since these accounts are just getting started, there are many years until that decision needs to be made. But what shouldn't get delayed is the conversation around where this fits into your family savings plan. And questions like the following should begin now. What are my family's goals for saving for children? What types of accounts meet those goals? Are we comfortable with our child owning the accounts when they turn 18? Because between the power of compounding and being short on time as parents, we'll get to it next week can very quickly turn into next month, next year, or never get addressed at all.

At Presilium, we help our clients determine the most effective ways to prioritize not only their own savings, but those for their children as well, incorporating it all into their long-term financial plan that evolves as their lives do. Thanks for watching, and until next time.