I have received a lot of inquiries about these accounts this year, and with less than a month before they are active, it is probably time to go over them. Even though you technically can’t make contributions until after the 4th of July (happy 250, America!), you can still sign up for them now. There is an app on both the iOS and Android store, or you can go to trumpaccounts.gov to sign up. I’ll stick with just the basics below, but feel free to respond with any specific questions!
Who is eligible-
- Anyone under 18 in the year the 4547 election is made (if they turn 18 this year, they are ineligible)
- The $1000 government contribution is available for anyone born 2025-2028 (anyone born outside these years do not get it)
- Only parents, legal guardians, adult siblings, or grandparents can open the account, but anyone can contribute, including the beneficiary themself and employers (subject to the maximum limits)
How they work
- They essentially operate as a non-deductible IRA that does not require earned income before the child turns 18 (non-deductible means it does not save you anything in taxes)
- The maximum contribution is $5k per child, per year (not per contributor)
- Other than the $1k government contribution, all other contributions must be tracked on form 8606 when the beneficiary files their taxes (just like any other non-deductible IRA)
- The earnings grow tax DEFERRED until the beneficiary withdraws money, which is subject to pro rata rules (if the basis is $5k and account balance is $10k, 50% of the withdrawal is taxable)
- Since it is an IRA, distributions before age 59.5 are subject to ordinary income taxes + a 10% penalty, with a very narrow set of exceptions. Additionally, the beneficiary CANNOT withdraw before 18!
What they are best for (and not)
- If you want to give your kids a head start on retirement, this is a pretty good option in addition to other strategies. Since there are taxes + penalties on early distributions, it is hard to argue it is good for anything else. For business owners, putting your kids on payroll and opening a Roth IRA is a much better option.
- If you want to save for college, this is not a great option. Unlike a 529, it is not deductible, and all earnings will be taxed (though the penalty is waived for qualified education expenses). Since the earnings are subject to the Kiddie Tax upon withdrawal, this is an especially bad option if you are high income.
- If you want to gift your kids money before retirement, such as for a wedding or down payment on a house, a brokerage account will be a better option. Not just for the tax difference, but for the unlimited contributions and distributions (not to mention the tax arbitrage by gifting highly appreciated securities)
The bottom line- if your child is eligible for the $1k govt contribution- hell yeah, get it!! Otherwise, unless some of the rules change, this is a great account for very limited niche situations, but definitely not every situation.
Resources
How To Avoid The Middle Class Tax Bomb
Make Life Your Beach
Memento Mori
Write Your Own Eulogy