A new savings option for children is now available, and families may want to take a closer look at how it works. Trump Accounts give families a new way to begin setting money aside for a child’s future while the child is still young.
While these accounts share some similarities with individual retirement accounts, they have their own rules during the years the child is still a minor. For families who are already thinking about education costs, future homeownership, business opportunities, or long-term financial planning, this may be another tool worth reviewing.
What Is a Trump Account?
A Trump Account is a type of investment account established for the benefit of an eligible child. The account is owned by the child, but while the child is a minor, an authorized adult is responsible for opening and managing the account.
In general, an eligible child must be under age 18 and have a valid Social Security number. A parent, guardian, or other authorized individual can file the required election to open the account.
The account is intended to give children an early start with long-term investing. During the growth period, the account is subject to special rules, including limits on contributions and restrictions on withdrawals.
Who Can Contribute?
One of the important features of Trump Accounts is that contributions may come from several sources. Parents, relatives, friends, employers, certain government entities, and charitable organizations may all be able to contribute, depending on the circumstances.
For most contributors, the annual contribution limit is $5,000 per child. This means that the total amount contributed by parents, relatives, friends, and employers generally cannot exceed $5,000 for the year. Employer contributions are also subject to a separate $2,500 limit during the growth period.
There is also a special pilot program for children born after December 31, 2024, and before January 1, 2029. Eligible children may qualify for a one-time $1,000 contribution from the U.S. Treasury.
Tax Considerations to Keep in Mind
Trump Accounts can have several tax considerations, and the treatment may depend on the source of the contribution and how the funds are eventually used.
In general, contributions from parents, relatives, or other individuals are made with after-tax dollars. Certain employer contributions may receive different tax treatment. The $1,000 pilot program contribution and some other qualified contributions may also be treated differently than regular family contributions.
Withdrawals are generally restricted while the child is a minor. Once the child reaches adulthood, many of the rules that apply to traditional IRAs may begin to apply. Some withdrawals may be penalty-free if they meet certain exceptions, such as qualified education expenses or a first-time home purchase. Other withdrawals may be subject to income taxes and an additional penalty.
Because the tax rules can vary based on how the account is funded and how money is withdrawn, families should review their situation before making decisions.
How to Open a Trump Account
Opening an account starts with Form 4547, Trump Account Election(s), or the IRS online election process.
Before getting started, families should have the child’s Social Security number, date of birth, and address available.
Is a Trump Account Right for Your Family?
A Trump Account may be useful as part of a broader savings and investment strategy, but it should not be viewed in isolation. Families may also need to consider 529 plans, custodial accounts, retirement savings, tax planning, and future liquidity needs.
DSJ can help you review how this new opportunity may apply to your family and whether it fits into your overall financial plan. If you would like to discuss next steps, please contact our office.