Trump Accounts Offer New Savings Opportunities for Families

Many of the questions I have been getting lately have to do with the new Trump savings accounts, which will launch in July. It has taken me a bit to figure out the mechanics and planning associated with these new accounts, but I have figured out enough to provide some insight and strategies.

If you have not heard, Trump accounts are a new type of savings account created by the government to help families invest money for the benefit of children under 18 years of age. As I have educated myself on this program, it is clear to me the intention of the policy is to help the families of children, and the children themselves, experience the long-term wealth-creating potential of the financial markets, and the stock market specifically. This goal is noble, in my opinion, as I believe the American economy, as reflected by our stock market, is a tremendous wealth creation engine, and the more Americans able to harness its long-term power, the better.

The accounts are tax deferred and intended for retirement, with similar tax treatment as a Traditional IRA. The actual tax rules for the accounts are where things get a little complicated. Contributions to the accounts made by parents, grandparents, relatives, or the child themselves are made on an after-tax basis, meaning no upfront tax deduction is allowed. The investments in the account will then grow tax deferred, and when withdrawn for qualified purposes the growth will then be subject to income tax while the contributions (basis) will not.

If this is not confusing enough, the accounts can also accept contributions from a parent's employer, charities and the government itself, which are all made on a pre-tax basis. Then, when these amounts are eventually withdrawn, the entire withdrawal is taxed as income. No withdrawals can occur before age 18.

At age 18, the accounts must be converted to a traditional IRA, and withdrawals occurring before age 59 1/2 will be subject to a 10% tax penalty on taxable portions of the withdrawal. Like all IRA accounts, however, there may be exceptions to the pre-59 1/2 withdrawal penalty for withdrawals taken for higher education, a first-time home purchase or some catastrophic medical expenses.

Balances in the accounts can be invested in Treasury Department-approved low-cost index mutual funds or exchange-traded funds, although I have not yet seen a list of approved investments.

For any baby born (American citizen) between Jan. 1, 2025 and Dec. 31, 2028, the federal government will deposit a one-time start-up grant of $1,000. In addition, the Dell Foundation pledged $6.25 billion in the form of a one-time $250 grant for American citizen children who were 10 or under at the end of 2025. The grant applies to any zip code with a median income of $150,000 or less, which does include all the communities in Lake and Porter counties. If this sounds like free money, it kind of is, and program materials indicate the amounts will be credited automatically after the account is created -- no additional application or request will be necessary.

The accounts can receive annual contributions of up to $5,000 from parents, the children themselves or grandparents. In addition, employers or charities can also contribute up to $2,500 annually.

I of course suggest anyone eligible for the government grant or Dell Foundation grant establish an account to receive this gift. Beyond this suggestion, however, things get a bit more complicated as we compare this option to other child savings options, such as 529 plans or gift accounts.

Whether or not a family should contribute on an ongoing basis depends on the source of funds and intention for the money. If the ongoing savings are intended for education expenses, an argument can be made that the tax rules associated with 529 savings plans are more attractive. But for families with the means to save beyond college and parental retirement, I can think of some strategies involving Trump accounts which could be very powerful over time. We will explore these strategies in future columns.

For now, just know the website to establish the accounts is live. The government has released IRS form 4547 for this purpose, and the form can be completed and accounts established at www.trumpaccounts.gov.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 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.