What are Trump Accounts?
New accounts have been created as a way for people to help kids save money to be used once the child achieves 18 years of age. These are not retirement accounts although they act just like one in form and function. The money is deposited into the account and invested (discussed later) and hopefully grows. The benefit is that they are not taxed on that growth. However, once the money starts to come out at age 18, if this is what the child chooses, it appears that it will be subject to income tax and 10% early withdrawal penalty just like an IRA. Keep in mind that current law allows for a waiver of that 10% early withdrawal penalty if the funds are used for higher education or a first-time home purchase.
Benefit: If the child was born AFTER January 1, 2025. Once the account has been opened, eligible accounts will receive a one-time deposit from the US Government called the pilot program contribution in the amount of $1,000. This is a one-time deposit for the life of the progam. All you have to do is fill out IRS Form 4547 to get it. In case you didn’t catch the irony of the form number, President Trump was US President number 45 and is number 47.
Who can contribute?
Anyone can contribute to a child’s account. Employers can also contribute to an employee’s kid accounts up to a limit of $2,500. The maximum number of dollars that can be contributed in aggregate to the account per year starting in 2026 is $5,000. Remember, this is for someone who was born after 1/01/2025, then you get an additional $1,000 for a grand total of $6,000 in 2026.
Special Clause
Kids from ages 1-10: For people who live in a zip code where the median income is less than $150,000 then they are eligible to receive a $250 contribution from the Michael and Susan Dell Foundation.
How they are invested
As of right now, it appears that these accounts must be invested in a certain way utilizing Exchange Traded Funds (ETF) that track a qualified index at an expense of.01% or less. More to come...
How to withdraw funds
As of today, it appears that the child must be 18 years of age to withdraw funds. As mentioned above, it appears for now that the funds would be treated as if the child had an IRA. So, if they choose to withdraw the funds, then as mentioned, they would be subject to IRA withdrawal rules as noted above.
My thoughts
I think that the $1,000 bonus is a great thing but not what we should focus on. Here is some math...
Grandpa Brad is overjoyed that his kiddo is pregnant with his first grandchild. Brad decides to open a Trump account and fund it with $5,000. He invests this in the S&P 500 Index and makes annual deposits of $5,000 a year every January. How much does grandbaby have at age 18?
$5,000 deposit
18 years of deposits of $5,000 a year every January
Annual Return rate of 6%
At age 18 grandbaby could have $162,992.13! But wait, there’s more... Grandpa Brad advises the now 18-year-old grandchild to roll that money into an IRA and then convert it to a ROTH IRA. There will be taxes due.
IRA Value $162,992.13 converts to a Roth. The converted value minus tax is around $130,000 to the Roth.
Still using a 6% annual rate of return with no more deposits from age 18 on...
When the grandchild turns 65 that Roth would be worth over $2,000,000. That $2 million would be disbursed tax free. How about that.
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