Trump Accounts Part Two: Claim It, Then Decide
A while back I wrote this post, explaining what Trump/530A accounts are and how to use them (or more accurately, how not use them). I also contributed to this New York Times article comparing the outcomes of saving for your kids in different types of accounts. The general consensus was that unless your child is eligible for the $1,000 bonus seed money being offered to kids born in 2025-2028, most families are better off skipping contributions to these accounts.
But since then, new information added a wrinkle in how these need to be handled, and that warrants a new post:
Every eligible (under 18, US citizen with a SSN) child is being auto-enrolled in these
The accounts may become destinations for automatic donations of stock by companies, which would come with restrictions like not being able to sell the shares for five years
Why I claimed my son's account
The idea of potential accounts floating out there, with the kids’ names on them but without their parents overseeing them, gives me some major ick. I think it’s a good idea for parents of eligible kids to claim the account. So, I did it for my own son. Click here for instructions on how to do that.
Once it's claimed, then what?
Once the account is established, what happens? The math hasn’t changed; it’s still true that for most parents, funding their own retirements and a 529 account for their kids leads to much better outcomes for everyone, and will probably soak up most available savings. But if you do want to contribute, or if the potential stock donations materialize, here’s what you need to know.
Once the account is approved you can link your bank account, debit card or Apple Pay. Bank account transfers take a few days, debit card and Apple Pay transfers are pretty much instant. The accounts are opened via the trumpaccount.gov website or Trump Account app, but Robinhood is the broker behind the scenes. (They won’t show up in a Robinhood profile, you have to use the official site or app). I linked my bank account and made a test deposit. (I also had my husband attempt to claim the same account for our son, as a test - that attempt should get rejected and I will update this post with the outcome)
Families’ contributions (and the $1,000 bonus for babies) are automatically invested in SPYM, which is a low-cost S&P 500 index ETF. I’d prefer to have the rest of the US stock market represented, but it’s fine. It’s automatically purchased, you can’t sell it. If stock is donated from outside companies like Dell and SpaceX, those shares would stay in the account as well, separate from SPYM.
How the taxes work
One of the questions when the accounts launched was how the taxation was going to work: families’ contributions would be after-tax, and the growth pre-tax. How would that difference get tracked? It seems like contributions are being accounted for specifically in the site: this makes sense because there’s an annual limit that can’t be exceeded. My assumption/hope is that Robinhood will maintain a record each year of how much was contributed over time, but we’ll have to check back as time goes on. These family contributions are after-tax and will form the “basis” of the IRA later.
At 18, it becomes an IRA
When the child turns 18, it becomes an IRA in their name. This is the reason why I think it’s important to claim the account and be able to track it: IRAs have a lot of rules and not knowing the account even exists can create a logistical and tax problem later.
But this also sets up a possible planning opportunity: you can fund the account until the year they turn 17, then at their 18th birthday, the child can convert the new IRA into a Roth IRA. Parents’ after-tax contributions wouldn't be taxed again on conversion, which is exactly why they need to be tracked separately. Say the account is worth $6,000: $4,000 you contributed and $2,000 of growth. Only the $2,000 would be a taxable conversion. (Any pre-tax money, like the $1,000 seed or employer contributions, would be taxable too.) If your 18-year-old has little other income, that tax bill could be small, and everything after that grows tax-free.Any growth in the account would be taxable. But this rests on several assumptions:
Your 18 year old can be trusted to leave the money alone
The money isn’t needed for anything else
Someone can pay the tax on the conversion
The kiddie tax isn’t an issue
Do not kid yourself, this is 10000000% a way for the rich to get richer. If you’ve fully funded your retirement and have money saved for your kids’ college, then this doesn’t really solve a problem for you. If you are trying to balance your own retirement savings with paying for college and everything else we face these days, then this doesn’t really help you do that.
What I'd do now:
Claim your child's account, so you know it exists and can keep an eye on it.
Don't feel pressure to fund it.
If you do fund it, think of it as a long-term Roth conversion opportunity, not a college fund.
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