Trump Accounts – Part 1
Trump Accounts – Part 1
Full Transcript:
Should I open a Trump account for my child? It could grow to millions of dollars!
Trump accounts went live last month. Today we’ll talk about what they are, and if one may be right for your child. Also, stay tuned for my next video, where I’ll cover an advanced planning technique for Trump accounts and some potential pitfalls. Trump accounts are a new type of investment account created for children by the 2025 tax bill. Any US child under the age of 18 with a valid Social Security number is eligible for a Trump account.
Now, families can generally contribute up to $5,000 per year per child and then invest the money in approved index funds. Now, you don’t get a tax deduction when you contribute directly to a Trump account, but the money does grow tax deferred. At age 18, it essentially transitions into an IRA. Now Trump accounts are designed for long term investments.
The Trump accounts website has an illustrative example. In one of their illustrative examples, they show a child whose parents contribute the maximum each year. So that’s $5,000 per year from birth that at age 18, the example shows that the account will have a balance of $271,000. Now, if the child leaves the money alone and lets it continue to compound at age 55, that account will have grown to $13 million.
Now, of course, this is an illustrative example and actual results will vary, but it still shows the power of long-term compounding. Now, even after age 55, when the child takes money out, there will be taxes. And if it’s before 59 ½, they could still face a 10% early withdrawal penalty. So, let’s talk about whether or not a Trump account is right for you.
First, let’s talk about free money. If your child was born between 2025 through 2028, the US Treasury will deposit $1,000 into the Trump account once opened. Now, there’s also private money available, and this is available for children that are ages 10 and under. The Dell Foundation will contribute $250 to each new account. Now, there are a lot more restrictions on this, so it won’t apply for everyone.
Also, $250 is less compelling reason to open one versus $1,000. Now, if your child is 11 through 17, they won’t qualify for either of these grants. Lastly, if your child is 18 and older, although they are your child, they’re still not a child and therefore they’re no longer eligible for a Trump account. One other area that I’ll keep a close eye on is employer matches and deferrals through paychecks.
Once there’s more information here, I’ll share more on social media. Now let’s talk about the use for the money. So how you want the money to be used may also help you decide if one’s right for you. With Trump accounts, if you’re trying to pay for college, they do have an exception to the 10% early withdrawal penalty when used for higher education.
However, you still have to pay taxes on the money, so it’s not the best account for college savings. My favorite account for college savings is a 529 college savings account. Qualified withdrawals come out tax free, and the contribution limits are drastically higher than Trump accounts. Now we talked about the 10% early withdrawal penalty and taxes. So, if you’re looking for something that’s really flexible, the Trump accounts probably not your best bet.
You may want to consider a custodial brokerage account in which you open the account in your child’s name, but you are the custodian, meaning you remain in control of that account until ages 18 or 21. Now, of course, you don’t get the same tax deferral advantage you do the Trump accounts, but you do get more flexibility. Now, if the thought of your child getting control of money at age 18 or 21 is not within your wishes right now, you could open an account that lets you remain in control to a farther age.
So, for example, you could open a trust or, more simpler, you could just keep the investment account in your name and then make it subject to a future gift. Now of course, each one of these has different levels of complexity and their own tax implications. Now, if your goal is to save for your child’s retirement now, this is where the Trump account really shines.
And of course, stay tuned for my next video where I’ll cover an advanced planning technique for saving for retirement for your child in a Trump account. Now, as you can see, there are a lot of considerations, so I encourage you to chat with your financial advisor about your unique situation.
Also, like this video on social media and share it with your colleagues if you find it valuable.
