Working with Trump Accounts for a Child’s Retirement #199

Trump accounts is what we're talking about today. We've had quite a few questions coming in on what a Trump account is, how to use it, how to not use it, and what exactly are the perks, the pros and the cons about it.

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Transcript

Wiser Financial Advisor – Working with Trump Accounts for a Child’s Retirement

Hi Everyone, and welcome to the Wiser Financial Advisor podcast, where we get real, we get honest, and we get clear about the financial world and your money. This is Josh Nelson, a Certified Financial Planner, founder and CEO of Keystone Financial Services. Let the financial fun begin!

Michael: Thank you everyone for joining us today. I have myself in the room, Michael Stevenson, Associate Wealth Advisor, and Jen Walenter, also an associate wealth advisor here at Keystone Financial Services. Trump accounts is what we're talking about today. We've had quite a few questions coming in on what a Trump account is, how to use it, how to not use it, and what exactly are the perks, the pros and the cons about it. So, Jen, do you want to get us kicked off with a brief overview? What is a Trump account and how did it come to be?

Jen: A Trump account is a tax advantaged IRA designed specifically for kids under 18. It was part of the One Big Beautiful Bill Act. Funds contributed to these accounts are designed to grow over time and ultimately become an IRA once the child turns 18. So, it's designed for long-term growth to set the child off on a good path for future retirement funds and planning.

Michael: It’s an opportunity to set your kids up for their retirement. There are other uses that you could bring into the picture as far as qualified expenses for these accounts. You could pull money out for college, although it's not designed for that. You could pull money out for other types of higher education or a down payment on a home. But the goal behind these accounts is retirement for your kids, getting them to retirement as defined by the IRS at age 59 and a half, though that might be age 65 or more. It’s a nest egg for their future and for their families.

Jen: So, Michael, who can open a Trump account?

Michael: It has to be a parent or a legal guardian of the child under 18. A parent or legal guardian can open it up for their kid who has to be under 18 and have a social security number, but a differentiated rule is that although I can have a number of IRAs, a child can have only one Trump account. So, if Mom and Dad open up a Trump account for their kid and then something happens down the line to where the child has other legal guardians, they can't open up a second Trump account for the child who already has one. That's important to pay attention to. The child must also be a US citizen with a social security number. There's some seed money out there that people are talking about. Is there really a free $1000 for everybody, and how do you go and get that? Jen, could you talk about what that $1,000 contribution is going to be from the government?

Jen: The big thing to note there is that unfortunately, the $1,000 seed money does not apply to every child under 18. The child has to be born between January 1st 2025 and December 31st 2028. Children born in that time frame can go ahead and get that free seed money, a $1,000 contribution right into their account. However, if your child was born outside of those date ranges but is under 18, they are still eligible to have an account opened and have it funded, but they miss out on that seed money.

Michael: I noticed that when I was doing my taxes, and that leads us into the next question I have for you: How do I get a Trump account for my kid? I'm aware of it because as we're talking now, it’s tax time in April. There's a new form. Could you tell us about what that form is or where I can go to register my kid for a Trump account?

Jen: The form to use is IRS form 4547. That’s where you will make the election to establish the account. You can go to the website, www.trumpaccounts.gov. That website will lead you through how to fill out the form and designate the important information, which gets you kick-started. 

Michael: That gets the wheels rolling as far as Trump accounts for your kid, or maybe it's your grandkid if you're the legal guardian. The actual accounts themselves still have some pending rules on where that account is going to be and who's going to be the custodial broker of that account. So, it's important for us to pay attention to this. If you file that form 4547, be watching out for updates on who the Treasury contracts with to hold these accounts. It could be a Fidelity or Schwab or Ameriprise account—or anybody, for all we know. They haven't announced it yet.

Jen: One other thing to note is when you go and apply for the account, which you can do by filling out that IRS form and going to that website, please note that contributions can begin July 4th, 2026. That's an important date. No contributions until that date, but any time after that, you are welcome to contribute. Now, Michael, are there contribution limits per year in those types of accounts?

Michael: Yes. There can be contributions of up to $5,000 per year. There’s a distinction about a Trump account versus, say a Roth IRA. For a custodial Roth IRA for your child, you must have income to contribute to that account. With a Trump account, you do not have to prove any income. So, parents, grandparents, anyone in the family or just a friend who loves your kid can gift money to them for a total of up to $5,000 per year in the Trump account. Those contributions go in on an after-tax basis, so you unfortunately don't get any sort of tax deduction or write-off for the Trump account, but it is going to grow tax-deferred. 

Taxation is a big topic on these accounts as far as, when I do pull money out of these accounts and how's it going to be taxed? I would assume on an after-tax basis, the principal would come out tax-free. Maybe there's tax on the growth, maybe not. I think they're still in the decision-making process with what's going to happen to taxation down the road. The anticipation is that it's going to be treated a lot like a traditional IRA, but there might be a hybrid approach to it where you have tax on gains and tax-free principal when withdrawn, but that will also be determined by whether or not that expense is qualified or non-qualified. There are a lot of details around taxation that are yet to come out, so keep your ears and eyes open.

Jen: Okay, what else can you say about how these types of accounts are invested? You mentioned earlier that the custodian of these accounts has yet to be announced. But what do we know about how these funds should be invested, for now?

Michael: The design of the accounts being long-term has created an investment strategy for the accounts where the money that goes into them is going to be invested into growth mutual funds or ETFs inside of the account. The Treasury or the government defines years 1 to 18 of a child's life as the growth period. During that time, at least 90% of the investments inside of the account will be in those growth mutual funds or ETFs. As far as we know, cash and money market holdings are not permitted. So, maybe that 90% is in the growth mutual funds or ETFs, and then 10% could potentially be in some intermediate or aggregate bond fund. There's not a whole lot of visibility right now as to what the investment options are going to be, but they do tell us you can count on most of it being in something like an S&P growth mutual fund or ETF. And you're talking about a timeline where a child must be at least 18 years old before being able to touch the money, but the goal behind it is more like 60 or 70 years that you're going to want it in a growth stock portfolio, a mutual fund or ETF portfolio. It’s a long-term investing structure.

Jen: The goal is that growth. Now, you brought up earlier that you could possibly pull out some of these funds for education expenses. We get a lot of questions about how this differs from a 529. While we won't go too far into the weeds on that, from what we can see between 529s compared to Trump accounts, 529s are earmarked for education expenses and those expenses are qualified. The Trump accounts are for truly long-term growth, long-term money for when the child retires. As you said earlier, Michael, there are some potential qualified expenses you can pull from the Trump account to go towards education, savings and a first-time house purchase. But the way this was designed was for that long-term growth.

Michael: Yeah, the Trump account being classified as an IRA attaches that nasty 10% penalty to it if you're pulling the money out prior to age 59 and a half. The nice part about qualified expenses, though, is that if it is a qualified expense, while it isn't set in stone, it is believed that we could circumvent that 10% penalty and avoid it with a qualified expense. Relating a Trump account to a 529, you said it perfectly. The Trump account is designed for long-term, not necessarily designed for higher education expenses, but a 529 is specifically designed for that. So, people have asked, “Should I use a 529 or a Trump account?” The answer is yes, use them both. Use a Trump account if you have a child born between 2025 and the end of 2028, there's a free $1,000, and you might as well go get it. After that, contribute as you're financially able to do so, for their long-term success. I would also prioritize a 529 to fund college or higher education in whatever form that might be. The difference is the tax treatment. We know what tax treatment we can get from a 529 as of today. If you put money inside of the 529, when you go to pull that for a higher education expense, it’s all tax-free because that is a qualified expense. Whereas for a Trump account, it’s still unknown whether college may be a qualified expense. Am I going to get all of that tax-free? Likely not. You'll likely pay some tax on the growth. That's where a 529 is going to beat a Trump account on the tax treatment when it’s used for that qualified expense. There's also a difference on the front end. When I put money into a 529, I can get a state tax deduction. When I put money into a Trump account, I don't get any deductions for it, which is an important difference. A 529 is a bit more restrictive in how you can use it. There are fewer qualified expenses. A Trump account's going to have a few more ways to go. But we're talking about the difference in goals. Each type of account is going to be beneficial in its own way. It's just important to differentiate the goal with these dollars and use the appropriate account. 

We’ve had some questions come in asking at what point do I gain the eligibility to use these funds in a Trump account? If my kid is going to private school and I have tuition to pay when they're 15, can I use my Trump account for that, or do I have to wait until they’re 18 before touching those dollars? What are the guidelines for that?

Jen: Money generally cannot be withdrawn until the child turns 18. It’s locked up, so to speak, in that account. Once a child turns 18, it will turn into a traditional IRA. After that, any withdrawals of earnings are then taxed as ordinary income, and they potentially face that 10% penalty you mentioned if the funds are taken out before age 59 and a half. So, unless they are used for a qualified expense or an exception applies, like a first-time home purchase or disability, those penalties could be applied to those withdrawals.

Michael: Waiting until 18 makes sense. You don't want to give a teenager a bucket of money. They're probably not going to spend that in the right way. I'd argue even at 18, I probably should not give them free range to go and do what they want. But at least they are doing a prudent thing in the treatment of this account by saying it’s going to function like a traditional IRA. That speaks to the importance of helping these young adults understand how to use these dollars. As parents, you have a responsibility to say, “Hey, we got this Trump account 15, 18 years ago. When you turn 18, the account turns over to you. You're in control, and here's how you should use it. Go talk to Michael, Jen, Josh, and Jeremy over at Keystone Financial Services, and understand how you can use this investment vehicle to your benefit.” The idea behind these accounts is to keep contributing to them. We're going to be talking about other things like Roth IRAs and 401Ks at work and things like that. But there's potential that as this kid grows up through their working years, they can utilize this account to save for retirement. This is a retirement asset. Hopefully we've been doing the planning inside of a 529 for college. There are plenty of qualified expenses we could list out to help fund this kid's expenses during their working years, whether that's a house or a car or a wedding. I'm not sure that would be qualified, but this money may be able to benefit that situation. So, it's important to make sure as parents, as guardians, to either educate them yourself or if you don't feel like you have the qualification to do that, people like us are here to help young adults understand how to get started with planning for retirement.

Jen: Absolutely. Well, I love that you mentioned the education aspect, because that's what we are all about here at Keystone. We try to make things simple and understandable, and educating young people who have come into money is no exception. We want to help them understand that somebody set up this Trump account when they were young, and now this money is that gift to them for when they're older. Maybe this sets up good financial planning habits for them before they even knew they had a financial account. It really helps them understand their future. We would be happy to have any conversations with any young kids out there who can grasp the concept of contributing and funding and investing. Pure education is something we enjoy doing.

Michael: Yeah, that's great. Well, I think we've covered quite a bit here. So, moms, dads out there, if you've got an eligible child, I'd recommend you take a look at that trumpaccounts.gov and see if that's something you'd like to get your little one enrolled in. If you're lucky and your kid is born between 2025 and 2028, there's a bit of seed money there for you. Give us a call if you have any further questions, something that we didn't cover or maybe a detail that was unclear. We'd be happy to chat with you over the phone on what Trump accounts are and how we might be able to utilize those in your planning. Let us know if you have questions. But otherwise, I think we can log off for today.

Jen: Perfect. This was fun. Have a great day, everyone.

Josh: We love feedback and we'd love it if you would pass it on to me directly at josh@keystonefinancial.com  Also, please stay plugged in with us, get updates on episodes, and help us promote the podcast by rating us five stars and subscribing to us at Apple Podcasts, Spotify, or your favorite podcast service.

The opinions voiced in the Wiser Financial Advisor show with host Josh Nelson are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor prior to investing. Investment advisory services offered through Keystone Financial Services, an SEC Registered Investment Advisor.