This weekend, we celebrated America’s 250th birthday—the semiquincentennial of the signing of the Declaration of Independence. While many people were celebrating the 4th of July with backyard cookouts, another celebration of sorts took place with the launching of the new Trump Accounts. These tax-advantaged investment accounts are designed for eligible children and help families get an early start on saving and investing. Because the program is new and additional guidance is still developing, families should understand how the accounts work, who can contribute and how they may fit with other savings options for children.
What Is a Trump Account?
A Trump Account is a new type of individual retirement account opened for a child. To be eligible, the child needs a valid Social Security number and must not turn 18 before the end of the calendar year. Contributions can come from a variety of sources, and contribution sources directly impact how future withdrawals are taxed.
How Families Can Get Started
A parent, legal guardian or other authorized person must make an election to establish a Trump Account. The official website, www.trumpaccounts.gov, is available to help families get started. From there, families can download the app or complete IRS Form 4547 online. After the election is submitted and validated, an official activation link will be sent. Be alert for scams; government agencies have warned that activation communications should not arrive by unsolicited text message or phone call. Currently, Trump Accounts can only be opened through the U.S. Treasury.
Who Can Contribute?
You may have heard of the federal pilot program, which will provide a one-time $1,000 contribution from the U.S. Treasury for eligible children born between January 1, 2025, and December 31, 2028. To receive this free government contribution, an election must be made, and the child must be a U.S. citizen.
In addition, employers, governmental and not-for-profit organizations, and friends and family may make contributions to a Trump Account for a child. But note there can only be one Trump Account per eligible child.
Contribution Limits
How much can be contributed varies by the source of the contribution:
- An annual aggregate limit of $5,000 per child per year applies to contributions made by friends and family. Contributions made by individuals are not tax-deductible.
- Employers who establish an eligible employer program can contribute up to $2,500 for an employee or their eligible children, which will count toward the $5,000 limit but is not considered taxable income to the employee.
- Contributions made by government entities and nonprofit organizations, and the $1,000 pilot program contributions do not count toward the annual $5,000 limit.
Recent IRS and Treasury guidance indicates that cash contributions to Trump Accounts may qualify for annual gift tax exclusion treatment. In many cases, a separate federal gift tax return should not be required just because the gift went into a Trump Account. Still, families should coordinate these gifts with other giving and file a gift tax return when needed.
How Money Is Invested and Accessed
During the growth period, investments are limited to low-cost mutual funds or exchange-traded funds that track broad U.S. equity indexes. The growth period runs from account opening through December 31 of the year before the child turns 18. Withdrawals are not allowed during this time, except in limited situations such as death or correction of excess contributions.
Once the growth period ends, most of the special Trump Account rules fall away, and the account generally starts following traditional IRA rules. Limitations on investments and withdrawals no longer apply, but retirement-account rules that impact taxation of distributions begin January 1 of the year the child reaches age 18. This includes when the 10% early withdrawal penalty applies to taxable amounts distributed prior to age 59 ½.
How Trump Accounts Fit With Other Savings Options
Trump Accounts are another savings account to consider when planning for a child’s future. A Trump Account is not the same as a bank savings account, a 529 education plan or a custodial account, such as a UGMA or UTMA account. It is a long-term investing tool, and at its core it is a retirement account. The right mix depends on what the family is saving for, how much flexibility they want and how the account fits into their overall plan.
- If the goal is education: A 529 savings plan provides tax-free withdrawals for educational expenses and even covers certain workplace credentials after traditional education has been completed.
- If flexibility is important: A custodial account may offer more flexibility for investing and access, but the child takes control when they reach the age of majority.
- If the child has earned income: A Roth IRA, which is tax-deferred, has the potential to provide tax-free earnings in retirement and gives access to contributions at any time.
Trump Accounts give families a new way to jumpstart savings early, especially for children who qualify for the $1,000 federal pilot program contribution. As guidance continues to develop, families should work with their financial, tax and legal advisors to explore how Trump Accounts fit with their broader savings, education, and retirement planning goals.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.