In Shakespeare’s famous tragedy, Juliet laments “What’s in a name? That which we call a rose by any other word would smell as sweet.” Juliet, of course, was referring to the forbidden last name Montague. And just as she didn’t reject Romeo for the offense of his name, you should not reject Trump Accounts. Whether you love him or hate him, the Trump Accounts should be considered, especially if your child or grandchild is born between 2025 and 2028—but there may be better account types available.
So, what exactly are Trump Accounts?
A Trump Account operates a bit like a Traditional IRA, but it is specifically intended for minor children. Some of the standard IRA rules apply, but there are also some new rules that are specific to the Trump Accounts. Disappointingly, they do not offer any tax deductions for contributions.
The number one most important thing to know is that children born between 2025 and 2028 will get a free $1,000 contribution from the U.S. Treasury! This is something that should ABSOLUTELY be taken advantage of.
How do they work?
- Trump Accounts can be opened by parents, guardians, and other authorized individuals
- The account has to be opened using the special Trump Accounts app
- Anyone can contribute, but the maximum contribution applies to the minor
- Maximum annual contributions of $5,000 per minor
- Contributions from individuals are post-tax
- Contributions from employers or non-profits are pre-tax
- There is only one investment option: State Street S&P 500 ETF (SPYM)
- The growth is all tax-deferred
- Funds generally cannot be withdrawn before the age of 59½
- Distributions are taxed according to IRA rules
How do I open a Trump Account?
The first step is to download the Trump Accounts app. Once you have the app downloaded, you’ll want to create an account and complete IRS Form 4547 within the app. After the IRS form is processed, you’ll receive an email to complete the account activation process. The account will be in the name of your child and under their Social Security number. They will be the legal owner and beneficiary of the account. You will effectively be the manager of the account until they turn 18.
After the account is activated, you can link your bank accounts or a debit card to it, so it’s easy for you to make contributions of your own, and you can also share a contribution link with friends or family if they’d like to make contributions on your child’s behalf.
Once an account is open, and contributions are made, you don’t have to do anything else. All the contributions in the account are automatically invested in SPYM. All the dividends and capital gains will be reinvested. The account is essentially on autopilot until the child turns 18.
When the child turns 18, the account will need to be rolled over to a normal IRA in their name. After this happens, all the standard IRA rules will apply. However, there is one very relevant IRA rule to highlight here. There will most likely be a mix of post-tax and pre-tax contributions in the account, and when post-tax money is taken out of an IRA, it is not taxable. This means that when the minor takes out those post-tax contributions, they will not be taxed on them! However, they’ll still have to pay taxes on the earnings and any pre-tax contributions.
When should I use a Trump Account?
This is the most important question, and the answer to this is very nuanced and highly dependent on client-specific goals. First of all, if your child was born anytime from January 1, 2025 to December 31, 2028 then you should absolutely, without a doubt, open a Trump Account. But beyond this, whether you should make contributions of your own to a Trump Account, or whether you should prioritize it over different account types that are available for your child, depends on several different factors.
When saving for kids, you have a number of account options: Trump Accounts, 529s, Custodial Brokerage Accounts, Custodial Roth IRAs, and Coverdell Education Accounts. And not one of these will meet all of your needs perfectly. There are pros and cons to each, and they have to be matched as closely as possible to each client’s priorities and preferences. Sometimes it’s best to layer strategies.
One potential strategy is to maximize the Trump Account contributions every year. The main purpose would be to give the child a head start on their retirement savings. Then, when the child turns 18, start converting the dollars to a Roth IRA, as aggressively as possible, to take advantage of their (presumably) very low tax bracket since a portion of the conversions will be subject to ordinary income tax when withdrawn. However, this may not be the best strategy for you and the unique goals that you want to fund. After all, it doesn’t provide the same tax-free growth of a 529 if used for qualified education expenses.
So, if you want to prioritize funding for college, making contributions to a 529 account may be a better option.
Maybe you would rather your child have more flexibility regarding how the funds are eventually used—perhaps for a down payment on a house or to pay for a wedding. If so, then a custodial brokerage account could be the right fit.
Do you own a small business and want to really jump-start your child’s retirement savings? If so, then they might be better served by opening and funding a custodial Roth IRA. Most importantly, you should ask yourself whether it is wise to make contributions on behalf of your child if your own financial future is uncertain.
Not one of these options fits every client’s needs entirely, and as we said earlier, at times the strategies are best layered. If you would like to talk through these questions and figure out how you can best help your child or grandchild, contact one of our advisors. We are here to thoughtfully guide you through the decision-making process and make sure that you’re putting your assets in accounts that will maximize the kind of meaningful impact you want to have on your minor’s life.
Whelan Financial is a registered investment adviser. This material is for educational and informational purposes only and does not constitute investment, tax, or legal advice, or a recommendation to buy or sell any security. References to a Whelan Financial investment strategy are descriptive only; no strategy is suitable for all investors, and eligibility is determined through an individual suitability review. Strategies concentrated in a single theme or sector carry additional risk, including greater volatility and the risk of loss of principal. Diversification does not ensure a profit or protect against loss. Past performance is not indicative of future results.
Authored by Whelan Financial
Preliminary language, parameters, and edits for this blog were crafted by the Whelan Financial team, with the help of generative AI.
