New accounts offer early investing start
The federal government's new child savings accounts are officially available to the investing public. Branded as "Trump" accounts, this new savings option offers some nice benefits that warrant investigation by most families, and certainly families of babies born during President Trump's second term.
While the government endeavored to make setting up and funding these accounts easy, it does still seem a little confusing to me, so let's go over some details.
Trump accounts are specialized, tax-advantaged investment accounts for U.S. children under 18. Think of them as a "starter IRA" with some unique rules tailored for kids and maybe some "free" money attached for babies and toddlers.
The most exciting feature of this program, in my opinion, is that babies born between January 1, 2025, and December 31, 2028, can get a one-time $1,000 contribution from the U.S. Treasury, called the "pilot program." While a number of rules apply, there seem to be no strings attached for this starter contribution.
In addition, children over the age of 2 and under the age of 10 (born 2016 to 2024), residing in zip codes with average income less than $150,000 (all communities in Lake and Porter counties) are also eligible to receive an additional $250 contribution from the Michael and Susan Dell Foundation. This contribution will be automatically deposited at some point in the next few months for all accounts established in these zip codes.
Beyond these attractive start-up benefits, the new accounts allow annual contributions of up to $5,000 per year per child from parents, family, employers, charities, or others. While these contributions are made with after-tax dollars (not deductible), the earnings grow tax-deferred over time.
During the "growth period" (until the child turns 18), funds must be invested into low-cost index funds or ETFs tracking broad U.S. stock indices like the S&P 500 or similar. The investment products available in the accounts must have low fees capped around 0.10%. After 18, more flexible IRA-like options open up.
The child's parent/guardian will serve as the custodian on the account until 18. Withdrawals before 18 are restricted; after 18, it behaves more like a traditional IRA (taxed as ordinary income on withdrawals, with potential penalties for non-qualified uses, though exceptions exist for things like education or a first home).
In order to be eligible for a Trump account, the child must be a U.S. citizen and have a Social Security number. Initial funding will come in the form of a tax credit, which will be deposited directly into the child's account. In order to claim the credit, families will need to file IRS Form 4547 (named intentionally), which can be accessed at TrumpAccounts.gov. The site is now live and appears to promote the downloading and use of a smart phone app to get the process started.
While this may change in the future, it appears that online brokerage firm RobinHood will serve as the trustee and hold the funds and investments for Trump accounts. The financial services industry appears to be working through other details regarding just which firms will be able to serve as trustees later in the program.
Being candid, the program has not been available long enough for my team to decide how to integrate this option into a family's financial planning and investment strategies, and we will need to sort through comparing Trump accounts to other types of saving options for minors.
This being said, the startup public and private contribution benefits for eligible children are difficult to pass up.
While in typical Trump fashion, this program seems a bit grandiose in my opinion, I do really appreciate what I perceive as the underlying philosophy to this idea. Investing in the American economy and participating in asset ownership are among the most powerful wealth-creation tools ever conceived. Giving more families the opportunity and experience of becoming investors has the capacity to not only create long-term wealth for future generations, but, just as importantly, create appreciation for our innovative American free market system and show the next generation the potential benefits of participating in financial markets over time.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
