Trump Accounts – Deal or No Deal?

There has been a lot going on in this country lately (the World Cup, $4.00 gasoline, and a cyclospora outbreak to name a few), so it’s understandable if you didn’t notice that we now have a new tax-advantaged savings vehicle.  Starting on July 4^th, Americans can now open Trump accounts for any child under the age of 18.  But are they a deal, or no deal?

To answer this, let me first explain the two components of these accounts.  First, there is some free initial seed money for new babies.  Any children born between 1/1/2025 – 12/31/2028 will receive $1,000 from the government when a new Trump account is opened in their name by a qualified relative (i.e. the parent who can claim them as a dependent).  Free money – great deal!  Second, this money and any other contributions made into the account will grow tax-deferred and will only be taxed when withdrawals are made some time after the child turns 18.  Unlike traditional IRA’s, the family’s contributions into these accounts (up to $5,000 per year) are not tax deductible.  And unlike Roth IRA’s and 529 accounts which are tax-free, all investment gains will be taxed even if withdrawn for qualified expenses.  So, the tax advantages of Trump accounts are better than nothing, but maybe not such a great deal when compared to some of the alternative tax-advantaged vehicles already available.

There are a couple of other caveats to note on these accounts as well.  As a financial advisor, I cannot open this account for you, nor can any other financial advisor.  An IRS form (Form 4547!!) needs to be filled out by the qualified relative to open the account.  You will not receive the $1,000 of free seed money for eligible babies unless you go through this process.  But a financial advisor can help you to determine whether these accounts make sense for you by discussing the pros and cons as well as any available alternatives.  So give me a call if you have any questions, because the answer to the question of deal or no deal will ultimately depend on you and your unique circumstances.