Trump Accounts: Take the $1,000 and Run

I would rather miss an R train at 11pm than have to talk about another type of investment account. But it’s in the news, so let’s dig into Trump Accounts.

These are accounts for children, intended to help parents and family members save for their kids’ retirement. When we think of kids’ accounts, we think of college, but these are not really meant to be a way to pay for college. They are retirement accounts where the owner (the child) doesn’t need to earn money for contributions to be made, at least not until they’re 18.

The big selling point of these is that kids born between 2025 and 2028 are eligible for a one-time $1,000 bonus from the Treasury. So if your child is eligible, definitely grab that for them. What about after that?

Until the child is 18, parents can contribute $5,000 a year to the account. There’s no tax deduction for money contributed, but it will grow tax-deferred. Employers can also choose to contribute up to $2,500 of the $5,000 maximum to employees’ and employees’ children’s accounts (they would get a tax break for this).

The money can’t be withdrawn at all until age 18. At that point, the account becomes a regular traditional IRA, subject to regular IRA rules. The child is the owner. This means that to continue to add to the account, they’d need to have earned income of their own.

Withdrawing the money would mean owing taxes, plus a 10% penalty until age 59 1/2. A qualified withdrawal for something like education expenses or a first home purchase would skip the penalty, but not the taxes. People in their teens and early 20s are usually not in very high tax brackets, so maybe the taxes won’t matter too much. But they’d be in full control of those distributions, and it’s not hard to imagine that going sideways.

Roth conversions would become available at age 18, which presents a really interesting and potentially valuable planning opportunity that would mitigate some of the eventual tax impact. But why not just make them Roth from the beginning?

Because these are so new (technically they don’t exist yet; we’re supposedly getting access to them on July 4), there are a lot of assumptions and guesses and weirdness as to how it will all work. If some of the dollars were already taxed (the parents’ contributions) and some were not (the growth and the employer contributions), who keeps track? If no one does, taxes will be paid twice on the parents’ contributions.

Investments will be limited to only US companies during the pre-18 growth period. Does that mean there will be a specific menu of investment choices, similar to a 401k?

UPDATE: yes, and we now know what's on that menu.

Maybe the most annoying twist is that contributions to these accounts will not qualify as gifts for purposes of the annual gift tax exclusion (that’s $19,000 this year). So, contributing to these accounts would mean a gift tax return has to be filed, because of the technical definition of a gift: the recipient does not have immediate access to the money, so these contributions don’t qualify. This seems bananas to me, and will lead to a lot of administrative confusion. Remember that gift taxes aren’t real, but the requirement to file the forms is real. UPDATE: a late ruling made this no longer an issue.

This all seems unnecessarily complicated and burdensome! I often say that anything can be retirement savings if you want it to be: IRAs, taxable brokerage accounts, real estate, bank accounts, etc etc etc. Anything you have counts. If you want to save for your kids’ far-off future, I think there are better ways to do it than this. So, get the $1,000 if eligible. Otherwise, skip it and let’s talk about some better options. If you want to open one, you can get started here.