At Hayes Wealth Advisors, questions about Trump accounts have been coming up all week. If you have kids (or even if you don’t), you’ve probably heard of President Trump’s self-named accounts for children. Not only are we getting asked whether they make sense for our clients, articles continue to pop up and and accountants have started incorporating them into annual tax workbooks. Parents, grandparent and employers... let’s take a look at how Trump Accounts actually work and who they may—or may not—be a good fit for. I know this isn't surprising, but like many government-run programs, these accounts can be a little confusing, so let’s start with the basics and build from there. Who Can Have a Trump Account? A Trump Account can generally be established for a child who: - Has not turned age 18 before the end of the calendar year in which the election is made
- Has a valid Social Security number
- Has not already had a Trump Account election filed on their behalf
Important to note: the child is the owner of the account and the ultimate decision maker on it's use (read more below). A parent, guardian, grandparent or other authorized individual can make the election to establish the initial account. How Do They Work? Trump Accounts allow parents, grandparents and other individuals to contribute up to $5,000 per year, in total, during the growth period. Employers can also contribute, subject to a $2,500 annual employer limit; employer contributions count toward the $5,000 overall annual limit. Employer contributions come with their own special set of rules, but contributions are deductible. Contributions are made with after-tax dollars and are invested in qualifying investments. The money can grow tax-deferred during the account’s growth period. From the calls we have, there seems to be a perception that these accounts are meant to help with child-related expenses. They’re not. During the growth period, distributions are generally prohibited. There are only limited exceptions, including certain rollovers, excess contributions, an ABLE rollover in the year the child turns 17, and distributions following the child’s death. The growth period ends December 31 of the year in which the child turns 17. Beginning January 1 of the year the child turns 18, the special Trump Account rules generally end and traditional IRA rules apply. This leads to an important planning consideration: the child owns the account. Once the child reaches the applicable age, the account is under the child’s control—not the parent’s. For example, if a parent contributed $5,000 per year for 18 years, that would be $90,000 of contributions before considering investment growth. That money would ultimately be under the child’s control. It is important to note, however, that these contributions are not simply transformed from after-tax dollars into fully pre-tax dollars. Since the contributions are not tax deductible, they create basis in the account that can come out tax free (please note it’s YOUR job to keep up with contributions) When distributions occur later, only the growth is taxable as ordinary income. What Happens After Age 18? Once the growth period ends, Trump Accounts generally follow traditional IRA distribution rules. Before age 59½, distributions may be subject to a 10% additional tax unless an exception applies. Some of the more relevant exceptions include: - Qualified higher-education expenses
- First-time home purchase, subject to the $10,000 lifetime limit
- Certain unreimbursed medical expenses
- Health insurance premiums while unemployed
- Disability
- Certain substantially equal periodic payments under Section 72(t)
- Certain birth or adoption distributions
- Certain emergency, disaster and domestic-abuse distributions
- IRS levies
- Qualified reservist distributions
Even when an exception eliminates the 10% additional tax, the distribution may still be subject to ordinary income tax. In my mind, this makes Trump Accounts more of a long-term wealth-building or retirement account than an education or child-expense account. Does the Government Contribute to Trump Accounts? For a select number of children under 18, yes. If you have a child who was born between January 1, 2025, and December 31, 2028, is a U.S. citizen, has a valid Social Security number and meets the other eligibility requirements, you can elect to receive a one-time $1,000 government contribution to the child’s Trump Account. The $1,000 does not count toward the annual $5,000 contribution limit. That $1,000 is a one-time contribution—not $1,000 per year. Where Are They Housed and What Can They Be Invested In? For the initial accounts, the Treasury Department has designated BNY as its financial agent. BNY has partnered with Robinhood, which serves as the brokerage and initial trustee. Treasury is overseeing the program and the initial account platform which is in the form of a downloadable app you can find HERE: During the growth period, investment choices are restricted to qualifying low-cost mutual funds and ETFs that track broad indexes of primarily U.S. companies. Treasury has selected five ETFs for the initial lineup, all board based stock indices. That being said, Trump Accounts can be transferred to another eligible trustee through a trustee-to-trustee transfer at some point in the future. Fidelity, for example, has announced plans to introduce Trump Account rollover functionality. What Are the Alternatives to a Trump Account? When deciding which account makes the most sense, it’s really important to know the end goal of the money. Trump Accounts vs. 529 Plans From an education-savings perspective, Trump Accounts and 529 plans have some similarities, but they work very differently. A 529 is specifically designed for education expenses and can offer state tax benefits depending on where you live. A Trump Account isn't limited to education, but it also doesn't provide tax-free withdrawals simply because the money is used for college. Trump Accounts also have a much lower annual contribution limit than most 529 plans. If your primary goal is to fund a child’s education, a 529 may be the more natural choice—particularly if your state provides a tax deduction or credit for contributions to its 529 plan. Trump Accounts vs. Roth IRAs Hands down, a Roth IRA can be a better option if your child has earned income and is eligible to contribute. Roth IRAs are also funded with after-tax dollars, but qualified withdrawals can ultimately be tax-free. In addition, Roth IRA contributions can generally be withdrawn at any time without income tax or the 10% additional tax. Investment earnings are different. Withdrawals of earnings before age 59½ may be subject to income tax and the 10% additional tax unless the exceptions listed above for traditional IRAs apply. The major limitation is that the child must have earned income to contribute to a Roth IRA. Trump Accounts vs. Custodial Accounts This is an interesting comparison. Both accounts can be funded with after-tax dollars, but their tax treatment is very different. A Trump Account is a tax-deferred retirement account. A custodial account, such as a UTMA or UGMA, is a taxable investment account. Investment income and realized capital gains in a custodial account can be taxable along the way, and special "kiddie tax" rules may apply depending on the child’s circumstances. The big advantage of a custodial account is flexibility. The money can generally be used for the benefit of the child without the Trump Account's restrictions on distributions. There is also an important control difference. A custodial account eventually transfers to the child under the applicable state’s rules, which can be at age 18, 21 or potentially later depending on the account type and state law. So the choice comes down to what you are trying to accomplish: long-term, tax-deferred investing with significant restrictions, or greater flexibility with a taxable custodial account. Conclusion While I don’t have kids myself yet, my colleague Natalie thinks that for her situation, Trump Accounts add another layer of complication without a lot of bang for the buck. She uses a combination of Roth IRAs (as a business owner) and custodial accounts to save for her kids’ futures, which accomplish much of the same things Trump accounts. But if I were to have a child who qualified for the government contribution, that free $1,000 kick-start would be very enticing as it hopefully it is for many Americans having children in the next few years. The right answer will vary by family. Hopefully, this gives you the tools to understand how Trump Accounts work and decide whether one makes sense for your situation. Have questions? Feel free to schedule a time on my calendar (below) to discuss further! Alexis Wealth Advisor Things turn out best for the people who make the best of the way things turn out" - John Wooden | 
