What is a Trump Account? | By Doug Dawe, CFP®
This year, parents can open a new type of investment account for their children called a “Trump Account.” Created through an initiative from President Donald Trump, the accounts are designed to help parents save for their children’s education, first-time home purchase, or retirement.
The federal government will contribute $1,000 to each child’s account when opened, if the child was born between January 1, 2025, and December 31, 2028. Up to $5,000 total per year can be contributed by others to each child’s account. Additionally, some large companies and philanthropic organizations have pledged to contribute to the accounts as well. Complete information can be found at trumpaccounts.gov, but here are a few of the details:
- The accounts can be opened for any child under 18, but only children born between January 1, 2025 and December 31, 2028 will receive $1,000 from the government when the account is opened.
- The account is in the child’s name. When the child turns 18, they gain control of the account.
- Like a traditional IRA, contributions are pre-tax, and growth is tax-deferred. At withdrawal, the full amount withdrawn is taxable as ordinary income. Also like a traditional IRA, withdrawals before age 59½ are penalized unless taken for a qualifying event such as education or a first-time home purchase.
To open an account, parents can complete Form 4547 and submit one of three ways:
- Through their IRS online account,
- With their tax return, or
- Through TrumpAccounts.gov.
Is Opening a Trump Account a Good Idea?
The advantage of a Trump Account is the ability to open a tax-deferred investment for a child immediately after birth, giving a VERY long timeframe for compound interest to work its magic. For example, if a Trump Account were opened at birth and the only money contributed was the original $1,000 deposit, after 65 years the balance would be over $148,000, assuming an 8% annualized return.
If the full $5,000 were contributed for the first 10 years of the child’s life, and nothing more after that, the balance at age 65 would be $4.98 million, assuming an 8% annualized return. This is a phenomenal illustration of the power of compounding, and in many cases is within reach for families. However, investment involves risk and there is no guarantee that this will be the result.
As an aside, an interesting planning opportunity arises based on the above scenario. At age 24, the balance of this account would be about $115,000. If the account owner were to convert that account to a Roth IRA, the remaining $4,865,000 of growth in that account would be tax free.
These examples show what time and compound interest can do. Not every family will contribute the maximum, but even smaller amounts can make a meaningful difference when they have decades to grow. If you have young children who qualify, be sure to take advantage of any free-money contributions available for their accounts.
As always, if you have any questions or would like additional information, please reach out to us at Fathom Financial Partners.
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