The recently introduced Trump Account (IRC Section 530A) is a new type of traditional IRA designed to help eligible children build long-term savings. While much of the attention has focused on the $1,000 federal contribution for eligible children born between 2025 and 2028, there are several other important features and planning considerations worth understanding.
Opening an Account
Parents, guardians, and certain other authorized individuals can elect to establish a Trump Account for an eligible child who has not reached age 18 before the end of the calendar year in which the election is made.
The election can be made through the IRS by signing into or creating an IRS account, authenticating through ID.me, and submitting Form 4547.
The official Trump Accounts app is also available to help families activate, fund, and manage accounts. A web version is available as well.
Government Seed Contribution
Children born between January 1, 2025, and December 31, 2028, may qualify for a one-time $1,000 federal pilot-program contribution if they are U.S. citizens with valid Social Security numbers and the required election is made.
The $1,000 federal contribution is separate from the annual $5,000 contribution limit that generally applies to other contributions.
Contributions
During the growth period, family members, friends, and other eligible individuals may contribute, subject to an aggregate annual limit of $5,000 for contributions that are subject to the limit. The limit is scheduled to be adjusted for inflation after 2027.
Employers may make qualifying contributions to an employee's Trump Account or to the Trump Account of the employee's dependent. These employer contributions are subject to a separate $2,500 annual limit and generally count toward the $5,000 annual limit.
Certain government and nonprofit contributions may be made under separate rules and generally are not subject to the $5,000 annual limit.
Investment Options
During the growth period, investments are generally limited to eligible mutual funds or exchange-traded funds that track an index of primarily U.S. companies and satisfy additional requirements.
Eligible investments generally must have annual fees and expenses of no more than 0.1% of the investment balance, among other requirements.
A Trump Account is a type of traditional IRA. Investment earnings generally are not currently included in the child's taxable income, although distributions are generally subject to traditional IRA tax rules after the growth period.
When the Child Turns 18
The special growth-period rules end on December 31 of the year before the calendar year in which the child turns 18.
Beginning January 1 of the year the child turns 18, most traditional IRA rules generally apply to the Trump Account.
The child is the account beneficiary throughout the account's existence; while the child is a minor, an authorized responsible party generally handles specified account-related matters on the child's behalf.
Withdrawals
During the growth period, distributions are generally prohibited, subject to limited exceptions, such as certain qualified rollovers, excess-contribution distributions, distributions after the beneficiary's death, and a qualified ABLE rollover at age 17.
Beginning in the calendar year the child turns 18, traditional IRA distribution rules generally apply. Distributions may be taxable and may be subject to the 10% additional tax on early distributions unless an exception applies.
Exceptions to the 10% additional tax can include certain qualified higher-education expenses and qualified first-home purchases, subject to the applicable traditional IRA rules.
Families may also consider a Roth IRA conversion after the growth period. The tax consequences depend on the tax basis and types of contributions in the account. For example, contributions from family members and other individuals generally create basis, while the $1,000 pilot-program contribution, certain qualified general contributions, and qualifying employer contributions do not create basis. Accordingly, the amount converted that is not attributable to basis may generally be taxable.
Potential Advantages
Eligible children may receive a $1,000 federal contribution that can be invested for many years.
The account provides a tax-advantaged savings vehicle that can complement options such as 529 plans and custodial investment accounts.
Employer and philanthropic contributions may provide additional funding opportunities.
A long investment horizon may provide substantial potential for compound growth.
Considerations
The child ultimately controls the account as the beneficiary once the child reaches adulthood.
The interaction between Trump Accounts and financial-aid calculations may depend on future guidance and the applicable aid program.
State tax treatment may differ from federal tax treatment.
Families should compare a Trump Account with alternatives such as a 529 plan, custodial brokerage account, or Roth IRA when the child has earned income to determine which combination best fits their financial and educational goals.
As with any new financial-planning opportunity, the value of a Trump Account depends on a family's goals, tax situation, and overall savings strategy. Families should consider the account alongside other education, investment, and retirement-savings options and consult their tax or financial professional regarding their individual circumstances.
Additional information can be found at: https://www.inc.com/fast-company-2/new-trump-accounts-child-investment-kids-530a-ira/91380231