In a previous column, I discussed some of the features of Trump accounts. In this column I will provide additional information based on the reporting of Robert Carlson, in his valuable newsletter Retirement Watch.
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As I pointed out in a previous column, the One Big Beautiful Bill Act contained a provision allowing an adult to establish a Trump account for any child under 18 who has a valid Social Security number by filing IRS Form 4547 with a Form 1040. The account could also be established through the online portal at TrumpAccounts.gov. Then, the U.S. Treasury would contribute $1,000 to that account in July 2026, which would be invested from birth until age 18, at which time, funds could be withdrawn by the beneficiary.
No withdrawals can be made until age 18. The IRS considers the period between birth and age 18 to be a “growth period.”
A Trump account can be established by any legal guardian, parent, adult sibling or grandparent. The account is established for the benefit of the child specified. The individual who opens the account becomes the “responsible party,” with the authority to direct investment choices from the eligible options.
Once the account is established, parents, relatives and friends can contribute up to $5,000 annually in “after tax” contributions from the birth of the child up to age 18. Employers may contribute up to $2,500 per year. After the beneficiary reaches age 18, the account is considered to be a traditional IRA, not a Roth or Simple IRA.
There are special rules associated with the account that do not apply to traditional IRA accounts. For example, funds can be contributed to this account up to age 18, even though the beneficiary does not have to have any earned income. If a beneficiary does have earned income, he/she may hold both a Trump account and a separate IRA account with contribution limits tracked separately.
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During the growth phase, up to age 18, the funds in the account must be invested in low-cost mutual funds or exchange-traded funds composed of primarily of U.S. stocks. Industry- and sector-specific index funds are not permitted. Funds must carry an expense ratio of no more than 0.1%. After age 18, the previous investment limitations would no longer be in effect.
After the beneficiary reaches 18, funds can be withdrawn from the Trump account. Contributions from parents, relatives and others, which have already been taxed, will not be taxable upon withdrawal. However, any employer contributions and any other contributions that were not previously taxed, such as the $1,000 Treasury contribution, and all investment earnings which have not been taxed, are considered pre-tax, and will be taxed as ordinary income upon withdrawal.
Carlson points out, “(I)f affluent families contribute the full $5,000 annually for 18 years, in addition to the $1,000 seed money, annual 7% return should compound to approximately $278,000 at age 18. If that account is converted to a Roth IRA at age 24, the parents or grandparents could pay the estimated tax bill on the conversion, and the account could grow to approximately $3.07 million by age 59 1/2.”
In a previous column, I pointed out that if that if the primary intention of the parents or other relatives is to fund the Trump account in order to pay for the beneficiary’s college education after reaching 18, then a 529 account may be more beneficial than funding the Trump account. Withdrawals from 529 accounts for tuition are considered qualified education expenses, and up to $35,000 can eventually be rolled into a Roth account tax-free. My recommendation is that parents and grandparents who are considering making some of the $5,000 per year contribution to the Trump account, or alternately contribute to a 529 plan, discuss the pros and cons of the two options, with a competent financial planner before deciding which contribution option makes the most sense.
Bottom line: Don’t ignore the potential growth of the Trump Account. When families contribute the $5,000 maximum per year allowed (which will increase in 2008 because of inflation adjustment), the value of the account could easily exceed $3 million by age 59 1/2 if the account is converted to a Roth IRA after the beneficiary reaches age 24.
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Elliot Raphaelson welcomes your questions and comments at [email protected].