What Parents Need To Know About Trump Accounts For Kids

Trump Accounts: Key Rules

Here are the key rules for the new 530A IRA, which is a special new IRA for kids, commonly referred to as Trump accounts.

Government Seed Money
$1,000 government seed contribution for eligible children born from 2025 through 2028.

Contribution Limits

• Annual contribution limit is $5,000/child (indexed for tax years after 2027) until the year they turn 18.
• Only one account is permitted per child.
• No earned income requirement, unlike regular IRA contributions.
• Accounts can be funded up to the annual limit by parents, grandparents, relatives, and even employers. Employers may only add up to $2,500 per year, which reduces the allowable family contribution but is not taxable to the employee.

Withdrawals and Access

• No distributions before age 18.
• On January 1st of the year the child turns 18, the account automatically transfers to a traditional IRA in the teen’s name. At that point it follows standard traditional IRA rules: a 10% penalty applies to withdrawals before age 59½ unless an exception is met, and distributions are mostly taxable as regular income.

Investment Options
As of now, the State Street SPDR S&P 500 ETF is the only investment choice.

Tax Treatment
The account enjoys tax-deferred growth until retirement.

Hypothetical Growth of a Trump Account

The benefits of funding a Trump IRA for kids may be significant. Imagine parents saved $5,000 every January for 18 years. For simplicity, assume contributions are level. Using a 7% annual rate of return and excluding the impact of fees or investment costs, by age 18, the hypothetical account is worth over $180,000. By age 65, the pre-tax value could be well over $4 million. Not bad for a $90,000 investment!

Taxes And Tax Planning Strategies For Trump Accounts

How Trump Accounts Are Taxed

Savings in Trump accounts are made on an after-tax basis, with limited exceptions for employers and some charities. The tax treatment of withdrawals from Trump accounts is consistent with traditional IRAs. The result is the same as a traditional IRA funded with a combination of pre-tax and non-deductible contributions: thanks to the pro-rata rule, each withdrawal is partially taxable as ordinary income and partially tax-free.

Because of the ongoing basis tracking requirements and extended horizon until the child’s retirement, there’s a real risk of paying tax twice on contributed dollars, unless other planning strategies are utilized.

Tax Planning Strategies

To maximize the benefits of tax-deferred growth and avoid the headaches of the pro-rata rule, if you plan to put money in a Trump account, consider helping your child with one of these tax strategies as a young adult.

Reverse rollover: A reverse rollover allows current employees to transfer pre-tax contributions from an IRA to a 401(k), leaving only after-tax dollars behind. Then a Roth conversion can be done without tax implications, resolving any issues with the pro-rata rule and ongoing basis tracking requirements.

Ongoing Roth conversions: Another option is ongoing Roth conversions after your child turns 18. Each Roth conversion will be subject to the pro-rata rule and therefore partially taxable. Although a young adult is likely to have little earned income, kiddie tax issues arise if the taxable amount exceeds a low threshold (which is currently $2,700). Investment income above the limit is taxable at the parents’ rate until the year the account owner turns 24.

Are Trump Accounts Worth It?

Comparing Investment Accounts For Kids

Trump accounts have some major advantages for parents with long-term savings goals for their children. But in most cases, participation should be in addition to your current strategy, not instead of. For families with extra cash, funding a Trump account may make sense when it doesn’t disrupt planned contributions to 529 plans, your 401(k), and other near-term goals.

Comparing Child Investment Accounts: Trump Accounts vs 529 Plans, Custodial Roth IRAs, and UGMA Accounts

As illustrated by the chart above, the primary investment vehicles for kids have different timelines, contribution limits, purposes, and tax rules. It’s also worth noting that the contribution limits for UGMA accounts and a superfunded 529 plan above reflect the gift tax rules for a married couple, but they aren’t hard caps and don’t preclude other family members from making their own contributions.

How To Open A Trump Account

To open, submit form 4547 through your IRS account or through the official Trump Accounts platform: https://trumpaccounts.gov/. Eventually accounts can be transferred to major brokerage platforms.

Investing In Their Future

Whether you’re looking to maximize the value of tax-free growth or provide more flexible access, getting kids started early builds good financial habits. Even if the kids aren’t contributing from their own cash, having them navigate the investment process with you will make them feel more connected to the outcome. And hopefully, better stewards of their own financial future.