What are they?
Trump accounts are a new type of traditional IRA(tax-deferred account) with special rules before a child turns 18. They wereconstructed to encourage long-term wealth building from an early age. Tocontribute to a traditional IRA, you must have a source of income. However,with Trump accounts, children can benefit from the generosity of others and thepower of tax-deferred growth starting as early as birth. These accounts are designedto give the next generation a sizable head start on retirement savings.
How do they work?
Trump accounts are split into two distinctive phases. Firstis referred to as the “Growth Period”. This is the period from the account’sinception until Dec 31st of the year before the beneficiary turns18. The second is referred to by several names – After Growth Period,Post-Growth Period or the Traditional IRA Period. This begins on January 1stof the year the child turns 18.
During the Growth Period, the account gains contributionsfrom family, friends, the government, and select philanthropic and governmententities. Restrictions are in place during this period to ensure thecontributions remain in the account and begin to grow. For example, contributionsgenerally cannot be touched during this period (with very few exceptions), andthe funds must be invested in a narrow window of US equity index mutual fundsor ETFs. The parent or custodian has control during this period.
On January 1st of the year the child turns 18,Trump accounts automatically become traditional IRAs under full control of thebeneficiary and the restrictions of the “Growth Period” are removed. Just likein a traditional IRA, withdrawals before age 59 ½ incur a 10% penalty unlesstaken for a qualified expense. Some qualified expenses include educationexpenses, certain medical expenses, and $10k toward first time home ownership. Allwithdrawals (including qualified withdrawals) are subject to ordinary incometax on any gains and contributions that were not taxed from the start. Also, inthis phase of the account, the beneficiary can roll their account into anothertraditional IRA or into a Roth IRA (tax implications will occur) at aninstitution of their choice.
Who can contribute?
There are 4 types of contributions to Trump Accounts:
1) Pilot Program: This is a one-time $1,000 federalseed contribution deposited by the US Treasury Department. To receive this, thechild must have been born between January 1st, 2025 and December 31,2028.
2) Qualified General Contributions: These arefunded by specific government entities or charitable organizations. Most notableof these is the Michael and Susan Dell Foundation donation of $250 to everychild under the age of 10 that doesn’t qualify for the pilot program seed moneyand lives in a zip code with a median household income under $150k. Othersinclude Ray and Barbara Dalio’s donation of $250 to children living inConnecticut, and Brad Gerstner’s donation of the same amount to children underfive living in Indiana. There is no limit to the amount of this type ofdonation your child’s account can receive.
3) Employer Contributions: Employers can contributeup to $2,500 per employee (not per employee’s dependent) toward Trump Accountsper year.
4) Contributions from Other Sources: These can comefrom a nearly unlimited number of sources, including parents, grandparents,extended family, and friends.
Note 1: Contributions from 3 &4 can only total $5,000 per year (indexed yearly for inflation). 1 & 2 haveno annual limits.
Note 2: None of these are includedin the beneficiary’s income at the time of deposit. Upon withdrawal, however, contributionswithout a basis (pre-tax contributions - 1, 2, and 3) and gains will be taxedas ordinary income. Contributions from 4 will enter the account with a basis(post-tax contributions) and only the gains will be taxed.
How to open an account (5 to 10 minutes):
1) Download the Trump Accounts App
2) Fill out your information and the beneficiary’sinformation when prompted. You will need the beneficiary’s SSN, your SSN, and agovernment issued ID of yourself.
3) Fill out form 4547 when prompted by the app.
4) Elect to receive the pilot money if beneficiaryis eligible (Section 6434 election).
5) Confirm your account.
My view on Trump Accounts:
Trump accounts provide a veryadvantageous way to start and grow a child’s retirement. To open a traditionalIRA and receive the tax advantage, you must have taxable earned income, butwith a Trump Account, a child can utilize the tax advantaged nature from asearly as birth. The added years of compounding can meaningfully increase growthpotential. With “free” seed money available to some children and the potential depositsfrom community leaders such as the Dell Family, opening an account is worthstrong consideration for most families.
In terms of your personalcontributions and how to use a Trump Account to benefit your child’s future,that depends on several factors including the amount you are looking to fundand the goals of your funding. For example, 529s remain the most powerful whensaving for higher education because of the tax-free withdrawals when taken foreducation and potential state income tax deduction. However, they are verylimited to education. On the other hand, UTMA’s provide excellent flexibility butlack the tax advantage nature. Comparisons of savings accounts for minors aremuch more complex and should constitute their own discussion. But in terms ofpure retirement savings for your child and the ability to accept the generosityof community leaders, family, and friends, Trump Accounts can be a compellingavenue for retirement-focused savings.
