Trump Accounts
Hi everyone, I'm hoping to hear your thoughts on the new Trump Accounts. I just had a baby last month.
Based on my limited understanding, it sounds like by opening a Trump Account I can get a $1000 initial investment from the government. Beyond that, I am able to make $5000 of post-tax contributions annually. (Essentially, it's like a Roth IRA that does not require the minor to have earned income.) And the funds can only be invested in broad, low-fee index funds.
When the child turns 18, the account would become an IRA in my child's name (A traditional IRA I think? Even though my pre-18 contributions were post-tax. That part is a bit confusing.) Do I have the basics correct?
My first thought is that I'd really like to invest in this account as a way to start retirement savings for my child as early as possible, so the money has extra decades to compound.
On the other hand, assets in my child's name could weigh heavily on the FAFSA at college time.
If my goal is to set my child up with strong early, tax-advantaged retirement savings, is the Trump Account a good choice? I'm curious whether/how others in the FI community plan to use these new
accounts.
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Congratulations! I would say take the free $1K for sure, but weigh the features of a Trump account against a UTMA and 529 when deciding what accounts you should contribute to.
Cody Garrett, CFP®wrote a great article (before Trump accounts were a thing) comparing the benefits of a UTMA vs. 529 vs. a taxable account for a child. His conclusion is to make use of all available accounts together for maximum flexibility and tax efficiency. You can apply the same analysis to a Trump account to decide how it fits into your planning.
You're correct that although your contributions are post-tax, the Trump account is treated like a traditional IRA for the beneficiary.
One potential concern is that although expense ratios of the funds held in a Trump account are limited to 0.1%, the law didn't include limits on fees the custodian can charge. We won't know if those fees are good or bad until the accounts become active later this year.
I plan to take advantage of a variety of savings accounts for my little one, including the Trump account. A couple things to consider: 1) since all of that money will be in a traditional IRA, they might run into tax complications later if they want to do a mega backdoor Roth with money rolled over from a 401k. 2) Keep in mind that at 18 years old, this money is under their legal control, not yours. That is potentially a lot of money to be handing over to a kid that age. It’s impossible to tell when they’re little how they will be in their young adult years, so there is some risk there.
My plan is to utilize multiple accounts and at 18, slowly start converting the funds in my son’s Trump account (turned IRA) from traditional to Roth. I am also not going to tell him what accounts exist in his name until he is older and able to manage money properly. This plan could become a bit tricky, but I imagine I’ll figure things out as I go.
This article might be helpful.
I found this article really helpful:
Trump Accounts for Kids – Pros, Cons, and Other Investing Options
I found this helpful. Sounds like if you err on your taxes one year, it could turn your after-tax contributions into essentially pre-tax ones, thus double paying income tax. I am solidly in the 12% marginal tax bracket, so I plan on using the 529 and taxable brokerage to save for my children. Gains on the taxable brokerage are taxed at 0% as long as AGI is under ~95k.
Tldr: If you get the $1k, take it, but be weary of contributing beyond that.
A quick google tells me that IRAs are not counted for FAFSA purposes, but 529s are!
For me, Trump accounts are a no-brainer. You can convert the traditional IRA to Roth when they turn 18 and they'll pay little to no tax. By the time they hit 20 their regular retirement will already be funded. I think the personal finance community has really not ingested the sea change that Trump accounts will cause for generational wealth building. It's hard to overstate the impact that effectively starting a Roth IRA at birth will have. Imagine growing up your entire life already knowing that your eventual retirement is already secure.
Thanks! That was my thinking as well. But like you said, I've not yet heard much talk about it within the community.
There is a long thread on Bogleheads forum where it seemed like they didn't think it was all that great, and were saying that it would be considered on the FAFSA.
But even if it were, starting this early for my kid's retirement feels like a huge win!