The July 4th launch of the Trump Accounts has generated many headlines. Some describe the accounts as a “trump
card” that could change the game for today’s youth, while others argue they may not be worth the effort. Even the
IRS form used to establish the account has made headlines because it was intentionally named “Form 4547” a
reference to the 45th and 47th President.
One question we are hearing quite often is, “Should we open one for our children under age 18?” As I’m sure no
one will be surprised to hear, the answer is: “It depends.”
While researching the answer, I visited trumpaccounts.gov, and the IRS website for information on Trump Accounts
https://www.irs.gov/trumpaccounts, but I found the fine-print details somewhat lacking. The IRS may clarify in
more detail later, as it often does, but new parents and new grandparents still want information now to decide
whether opening an account makes sense.
A few facts you should know:
Any U.S. Citizen with a Social Security Number under the age of 18 can have a Trump Account.
To receive the Pilot $1,000 seed funds deposit, the child, who is the beneficiary, must be born in the years
2025-2028.
Contribution limits do apply annually and can be pre-tax or after-tax depending on the source.
The U.S. Treasury Department named BNY Mellon as the agent with Robinhood as the broker and trustee
for these accounts.
The guardian will choose the very limited investment options for the funds to grow, but when the child
turns 18, they will take over the account.
Current regulations state this account is treated as an IRA at age 18 with all the restrictions to age 59-1/2
and the allowed exemptions of the 10% penalty.
This information informs me the account will require detailed records each year to track contribution types and
determine the taxable portion of the account. The IRS has already created Form 5498-TA to track basis, similar to
the form sent each May for other retirement accounts. However, calculating taxes on withdrawals or conversions
may not be simple if these accounts resemble current IRAs with mixed contribution types. Waiting until age 59½
could allow for significant long-term growth and income, but the growth and some contributions may eventually be
taxed as ordinary income rates.
The $1,000 seed money is a definite plus for those who qualify. Many companies are adding contributions based on
factors such as a child’s geographic region, state, or birth year. Some employers are also considering adding the
Trump Account Contribution Program to their employee benefits package. However, calling the Trump Account a
“trump card” for today’s youth may be a stretch, given other investment vehicles and opportunities available with
different withdrawal rules and tax benefits.
Contributions are now flowing after the U.S. Treasury Department launched the Trump Account app this week. As
noted earlier, any child under the age of 18, with a Social Security number, can participate. Only US citizens born
between January 2025 and December 2028 can receive the $1,000 government deposit.
The maximum annual contributions are set at $5,000, with the money automatically invested in low-cost index funds.
The biggest impact of the accounts, though, could be felt many decades down the line when the emerging generation
of Americans are ready to retire.
Overall, the new Trump Accounts are a way for families to help supercharge their kids’ retirement savings. Any
money invested at a very early age, and allowed to grow over a long time period, could be a substantial sum by the
time someone turns 60 or 65 years old.
Trump Accounts as Retirement Vehicles
It’s not much of a stretch to connect the accounts with retirement goals considering they are technically a type of
traditional IRA with some added restrictions. Withdrawals are generally prohibited before the beneficiary turns 18,
for example. Otherwise, they are essentially IRAs with no earned income requirement before age 18, and
withdrawals before age 59.5 are subject to standard income taxes plus a 10% early withdrawal penalty.
Currently, the IRS has a priority order for individuals who may open a Trump account on a child’s behalf:
Legal guardians are first.
Parents are second, followed by adult siblings or grandparents of the beneficiary.
Specific policies also exist as to who can open an account for foster children, orphans, emancipated minors and
wards of the state.
More Than One Option.
Trump accounts aren’t the only option for saving on behalf of children. One alternative is 529 accounts, which offer
significant tax advantages for education expenses. In addition, up to $35,000 in a 529 plan can now be rolled into a
Roth IRA (subject to annual contribution limit currently $7,500) if the 529 account has been open and funded for at
least 15 years.
Brokerage accounts are another option that could compete with Trump accounts, as detailed in an analysis from the
Bipartisan Policy Center (BPC). Although they lack tax deferral or tax-free withdrawals, investment returns are
typically taxed at the long-term capital gains rate, which can be substantially lower than ordinary income tax rates.
As a result, the BPC found, a brokerage account invested in a low- or no-dividend mutual fund could potentially
outperform a Trump account over long time horizons.
If you would like to learn whether Trump Accounts or other investment strategies may be appropriate for your child,
grandchild, or another young person in your life, please feel welcome to contact us or consult with your tax
professional or Financial Advisor. Prudential Advisors do not provide tax advice.
Trump Accounts are Here!
