The Treasury Department has now created Trump Accounts for every eligible child , raising a host of considerations for parents and guardians.
Because employers, state and local governments and charities with wealthy benefactors might also make contributions, that is. Because the $1,000 seed money counts as earnings, and IRA distributions that include after-tax money are partially taxable, any distribution you take will be one-third taxable. Because the earnings aren’t taxable, for parents saving for college, 529 education saving plans offer more substantial tax benefits. Because the earnings would be largely untaxed until the shares are sold, even an old-fashioned custodial brokerage account can beat a Trump Account if it is invested in a mutual fund with low or no dividends,. Because they offer potentially decades of tax-deferred growth, and unlike a Roth IRA can accept contributions even if the child isn’t working, contributing to the accounts could make sense for parents who want to get a super early start on their child’s retirement nest egg, said Berger,.
The new type of savings account is a custodial individual retirement account for children, with special rules until the year the child turns 18. For the next few years, the Trump Accounts come with $1,000 of seed money from the Treasury Department for newborns. Still, parents or guardians must claim the accounts to request the $1,000 and make their own contributions. The $1,000 is a good deal, but the accounts can also make sense for children who don’t qualify for that money. Offerings such as 529 education savings plans and even taxable custodial accounts are more flexible and have better tax advantages for parents’ contributions. Financial advisers say the best case for adding family money to the accounts could be for wealthy people who have already maxed out 529 savings plans and want to also jump-start their young children’s retirement savings. Any child with a Social Security number who is under age 18 at the end of the year the account is established. Under a pilot program, the Treasury Department is seeding the accounts with $1,000 for children born between Jan. 1, 2025 and Dec. 31, 2028, who have a Social Security number and are U.S. citizens. The accounts rolled out on July 4. Once you’ve claimed an account, you can request the $1,000 in federal money, make contributions and see if any charitable contributions have come in. At launch, all contributions to Trump Accounts are invested in the State Street SPDR Portfolio S&P 500 ETF , a low-cost exchange-traded fund that tracks the performance of the S&P 500 index. Beyond the $1,000 federal seed money, others can contribute to the accounts. Parents, relatives and friends can contribute up to $5,000 annually in after-tax dollars for years before the year the child turns 18. Employers can contribute up to $2,500 for an employee or an employee’s dependent. This counts toward the $5,000 cap. 1 of the year he or she turns 18. As with a regular IRA, there is an early distribution penalty for withdrawals before age 59 ½, unless an exception applies, such as using the money for higher education, or up to $10,000 for a first-time home purchase. Say you accept the $1,000 and you use it for college. Then you pay federal income taxes on the withdrawal of the $1,000 and any earnings. You’ll also have to pay a 10% penalty. To make matters even more complicated, say you contributed $10,000 of after-tax money to the account on top of the $1,000 seed money, and there is $4,000 of investment earnings. If you take out $6,000 in this case, $2,000 would be taxed, no matter what you use it for and at what age. Contributions from employers and charities have the same tax treatment as the $1,000 seed money. If the total taxable gifts made by a taxpayer to an individual don’t exceed the annual exclusion amount of $19,000, no gift tax return is required. Converting the account into a Roth IRA at age 18 or in early adulthood could provide decades of tax-free growth. But that is assuming the 18-year-old doesn’t cash out.
Vanguard, for one, has said it is supporting rollovers. The Treasury Department said that philanthropic contributions of stock could go into Trump Accounts, without being converted into index-fund holdings. You can’t cherry pick to take out just the after-tax contributions as you can do with a Roth IRA, said Ian Berger, an IRA analyst with Ed Slott & Co. in Rockville Centre, N.Y. At that point they would be taxed as capital gains, not as ordinary income, said Gregory Leiserson, a senior fellow at the Tax Law Center at NYU Law.
This explanatory article may be periodically updated. That money will grow tax-deferred, with income taxes due upon withdrawal. The Treasury is automatically enrolling children in accounts, and donations from philanthropists are starting to flow in. For most families, it doesn’t make sense to add their own money. The Treasury Department is overseeing the program, and banks and other financial institutions are administering accounts. Bank of New York Mellon and Robinhood Markets are managing the initial accounts . The accounts can be rolled over to other companies, once the Treasury establishes procedures. Those with eligible children can claim their accounts on the Trump Account app or at Trumpaccount.com , the web version of the app. You can contribute by using a debit card or linking a bank account. The Treasury Department has selected other low-cost index ETFs for the lineup from BlackRock’s iShares, State Street and Vanguard. The accounts can now receive donations of individual stock from nonprofits, and those holdings generally can’t be sold for five years. Families and employers still must contribute in cash. The amount increases annually with inflation. Employers might allow employees to direct pretax salary to Trump Accounts for their employees’ children, up to the same limit. Getting that upfront tax break could put Trump Accounts higher on the priority list for where parents put away money for their children. The Trump administration has been urging corporations, charities and wealthy individuals to contribute to the accounts, meaning that many people qualify to get extra seed money when they sign up. These general donations are uncapped. Taxes are where the accounts get complicated. It depends on who put the money in, how old you are when you take it out and what you’re using it for. You don’t pay taxes on dividends and capital gains that remain in the account. The beneficiary could empty it and use the money for anything on Jan. The withdrawals count as taxable income. Say you use it to buy a car. If you use the money to buy a car after age 59½, you’ll owe income taxes but no penalty. The IRS loosened a gift-tax return filing requirement for most contributors that had been a big complication for Trump Accounts. For older children, as soon as they start earning income, parents can help them set up a custodial Roth IRA . Contributions to those can come out tax-free anytime and are never subject to penalties. Write to Ashlea Ebeling at [email protected] and Richard Rubin at [email protected]
