The July 4 launch of Trump Accounts and trumpaccounts.gov has generated a wide range of headlines. Some describe the accounts as a “trump card” that could change the game for today’s youth, while others argue they may not be worth the effort. Even the IRS form used to establish the account has made headlines because it was intentionally named Form 4547, a reference to the 45th and 47th President.
One question we hear often is, “Should we open one for our children under age 18?” After recently becoming “Grandma” with the birth of my first grandchild, I wanted to know the answer, too. As I’m sure no one will be surprised to hear, the answer is: “It depends.”
While researching the answer, I visited trumpaccounts.gov and the IRS website for information on Trump Accounts, but I found the fine-print details lacking. The IRS may clarify later, as it often does, but financial advisors, new parents, and new grandparents like me still need enough information now to decide whether opening an account makes sense.
A few facts:
· Any U.S. Citizen with a Social Security Number under age 18 can have a Trump Account.
· To receive the Pilot $1,000 seed funds deposit, the child, who is the beneficiary, must be born in the years 2025-2028.
· Contribution limits do apply annually and can be pre-tax or after-tax depending on the source.
· The U.S. Treasury Department named BNY Mellon as the agent with Robinhood as the broker and trustee for these accounts.
· The guardian will choose the very limited investment options for the funds to grow, but when the child turns 18, they will take over the account.
· Current regulations state this account is treated as an IRA at age 18 with all the restrictions to age 59-1/2 and the allowed exemptions of the 10% penalty.
This tells me the account will require detailed records each year to track contribution types and determine the taxable portion of the account. The IRS has already created Form 5498-TA to track basis, similar to the form sent each May for other retirement accounts. However, calculating taxes on withdrawals or conversions may not be simple if these accounts resemble current IRAs with mixed contribution types. Waiting until age 59½ could allow for significant long-term growth and income, but the growth and some contributions may eventually be taxed at ordinary income rates.
The $1,000 seed money is a definite plus for those who qualify. Well-known companies, including Dell, are already adding contributions based on factors such as a child’s geographic region, state, or birth year. Some employers may also choose to add the Trump Account Contribution Program to their benefits package.
However, calling the Trump Account a “trump card” for today’s youth may be a stretch, given the other investment vehicles and opportunities available with different withdrawal rules and tax benefits. If you would like to learn whether Trump Accounts or other investment accounts may be appropriate for your child, grandchild, or another young person in your life, feel free to contact us at Vision Based Planning.
No client or potential client should assume that any information presented or made available on or through this blog should be construed as personalized financial planning or investment advice. Personalized financial planning and investment advice can only be rendered after engagement of the firm for services, execution of the required documentation, and receipt of required disclosures. Please contact the firm for further information.