A new investment account for children has been getting a lot of attention, especially with headlines about the government providing a $1,000 contribution for eligible children. But before parents and grandparents decide to contribute their own money, there are some important details to understand.
In this episode of Accessible Finance for Retirement, Eric and Rachael Johns of Equilibrium Financial Planning break down the new Trump Accounts, also known as Section 530A accounts. They discuss who can open an account, which children may qualify for the government contribution, how family members can contribute, and what happens when a child turns 18.
They also compare Trump Accounts with other ways to save and invest for children, including 529 plans, Roth IRAs, and taxable brokerage accounts. Along the way, Eric explains why the account's tax treatment and withdrawal restrictions may make other options more attractive in many situations.
In this episode, you'll learn:
Who may qualify for the $1,000 government contribution.
Whether parents, grandparents, and employers can contribute.
How the investment choices and contribution restrictions work.
What happens to a Trump Account when a child turns 18.
How Trump Accounts compare with 529 plans, Roth IRAs, and brokerage accounts.
The two situations Eric identifies where a Trump Account may be worth considering.
A new account or government contribution can sound appealing, but the best choice depends on what you're trying to accomplish with the money. Understanding the trade-offs can help you make a better decision for your family's overall financial plan.
What is a Trump Account?
A Trump Account, formally referred to in the episode as a Section 530A account, is a new type of investment account designed to help children build long-term savings.
The idea is to invest money early in a child's life and give it decades to potentially grow. Unlike a traditional savings account, the money is invested in the market, so its value can fluctuate. Investment growth is not guaranteed, and the account can lose value.
One of the most important distinctions is that these accounts are designed with long-term retirement savings in mind—not necessarily to provide money for a child's first car, wedding, home, or other early-adulthood expenses.
That distinction matters because the account has rules governing when money can be accessed and how withdrawals are taxed.
Who qualifies for the $1,000 government contribution?
One of the biggest questions surrounding Trump Accounts is whether every child receives $1,000.
As discussed in the episode, the government contribution is intended for children born within a specified four-year window: January 1, 2025, through December 31, 2028. The episode also explains that families should not assume the contribution happens automatically. Parents or guardians need to follow the required process to claim the account and applicable contribution.
The discussion references IRS Form 4547 and the Treasury's Trump Accounts website as part of that process.
There is an important distinction between being eligible to open a Trump Account and qualifying for the government contribution. A child outside the specified birth-date window may still be eligible for an account, even if they do not qualify for the $1,000 contribution discussed in the episode.
The takeaway: Don't assume your child has received the government contribution just because they meet the age requirements. Check the current eligibility rules and required steps before relying on the money being there.
Can parents and grandparents contribute?
The episode discusses contributions from parents, grandparents, employers, and other third parties. It describes an aggregate annual contribution limit of $5,000 for certain contributions.
That means families should consider contributions from all sources together rather than assuming each family member has a separate limit.
The government contribution is discussed separately from that limit in the episode, but families should confirm the current rules before planning around how different contributions interact.
Another important distinction: children do not need earned income to receive contributions to a Trump Account, unlike a Roth IRA. This can make the account seem appealing for younger children who have no employment income.
However, the absence of an earned-income requirement does not automatically make a Trump Account the best place to put money intended for a child.
How are Trump Accounts invested?
Trump Accounts are not necessarily like unrestricted brokerage accounts where an investor can choose from thousands of stocks, bonds, and funds.
As discussed in the episode, the investment options are a curated list of funds. At the time of the recording, Eric explains that the available option was an S&P 500 fund, with additional broad U.S. stock-market options expected to become available.
These investments provide exposure to the stock market, which means the account balance can rise or fall. A government contribution is a defined amount of money going into the account—not a guarantee of what that money will be worth years later.
This is worth emphasizing for parents and grandparents. If your goal is to make sure a certain amount of money is available when a child reaches a particular age, a stock-market investment does not guarantee that outcome.
The long time horizon may make stock-market investing reasonable for some goals, but families should understand the risk and the restrictions before contributing.
What happens when a child turns 18?
This is one of the most important questions in the episode.
Eric explains that when a child reaches age 18, the account converts to a traditional IRA. That transition has significant implications for how the money can be accessed and taxed.
Contributions made with after-tax dollars create tax basis that needs to be tracked. The investment growth is generally subject to ordinary income tax when distributed. Withdrawals before age 59½ may also be subject to a 10% early-distribution penalty unless an exception applies.
In other words, the account is not simply a pot of money a young adult can freely use when they turn 18.
This is why the episode emphasizes that families should not think of a Trump Account as a substitute for a savings account intended to fund a child's early-adult expenses.
There is also an ongoing recordkeeping responsibility. Families need to keep track of contributions and the associated tax basis so that the same dollars are not taxed twice. If those records are incomplete, determining the taxable portion of a future distribution or conversion can become more difficult.
Trump Account vs. 529 plan vs. Roth IRA vs. brokerage account
A major part of the conversation is how Trump Accounts compare with other ways to save and invest for children.
The right choice depends on the purpose of the money. Saving for education, helping a child build retirement savings, and transferring wealth to the next generation are different goals—and they don't necessarily call for the same account.
Trump Account vs. 529 plan
If the goal is to save for education, Eric's preference in the episode is clear: a 529 plan remains the better fit.
A 529 plan is specifically designed for education savings. Investments can grow tax-free, and withdrawals are generally tax-free when used for qualified education expenses. Depending on the state, contributions may also qualify for a state income-tax benefit.
For Louisiana families, the episode notes that eligible 529 contributions can provide a state income-tax benefit. The exact benefit depends on current Louisiana rules and the taxpayer's circumstances.
The important difference is the purpose of the account. A 529 is built around education expenses, while a Trump Account is designed for long-term savings with different withdrawal and tax rules.
Trump Account vs. Roth IRA
The Roth IRA comparison is particularly important when a child has earned income.
A child with legitimate earned income may be eligible to contribute to a Roth IRA, subject to the applicable rules and limits. Contributions are made with after-tax dollars, and qualified withdrawals can be tax-free.
One significant advantage is that Roth IRA contributions can generally be withdrawn at any time without income tax or the 10% early-distribution penalty. Investment earnings have different withdrawal rules.
Eric's view in the episode is that when a child has earned income and is eligible to contribute to a Roth IRA, the Roth IRA is generally the more attractive option.
This is especially relevant for parents who have children working in a family business or earning money through legitimate employment. Rather than automatically directing money into a Trump Account, families may want to explore whether helping the child fund a Roth IRA better accomplishes their goal.
Trump Account vs. taxable brokerage account
A taxable brokerage account offers another alternative.
Unlike a Trump Account, a brokerage account generally provides more flexibility over investment choices and access to the money. Investment gains may qualify for capital-gains tax treatment, depending on the investment and the circumstances.
A brokerage account can also provide opportunities for tax-loss harvesting, which may help offset certain investment gains or income.
Eric points out that families sometimes focus on putting money directly in a child's name when they may be better off retaining control of the assets and gifting money later when the child actually needs it.
That decision can involve estate planning, gift-tax considerations, income-tax brackets, and the family's broader financial picture. It is not always necessary to put assets in a child's name immediately to help that child financially.
When might a Trump Account make sense?
Despite Eric's reservations about using Trump Accounts instead of other available options, he identifies two situations worth considering.
1. Your child qualifies for the $1,000 government contribution.
If your child qualifies for the government-funded contribution, the episode's advice is straightforward: take advantage of the contribution, assuming the account and its terms are appropriate for your circumstances. The family does not necessarily need to contribute its own money to receive that benefit.
2. Your child is close to age 18 and you've already addressed other priorities.
Eric also discusses a more specialized strategy for families who have already funded their own retirement accounts, addressed other financial priorities, and want to transfer additional wealth to a child.
The idea is to make contributions relatively close to the child's 18th birthday, then evaluate whether converting the account to a Roth IRA makes sense after the account transitions to a traditional IRA.
The timing matters because investment growth in the account may be taxable when converted. The larger the growth relative to the after-tax contributions, the larger the potential taxable amount associated with a conversion.
This is a more advanced strategy, not a general recommendation for every family. It requires careful attention to contribution basis, conversion rules, timing, and the child's tax situation.
Think about the whole family financial plan
One of the broader points in this conversation is that saving for children should not be treated as a completely separate exercise from the parents' financial plan.
Parents and grandparents naturally want to give their children a financial head start. But that doesn't mean every available account needs to be funded.
Before contributing to a new account, consider:
Are you adequately saving for your own retirement?
Have you considered the tax benefits and limitations of a 529 plan?
Does your child have earned income that would allow a Roth IRA contribution?
Would a taxable brokerage account provide more flexibility?
Do you actually want the money in your child's name now, or would you prefer to retain control and gift it later?
A financial strategy that helps your children should also account for your own financial security. In many cases, the best way to help the next generation is to make sure your own financial plan is on solid ground.
Key takeaways
Don't assume every child receives $1,000. Eligibility depends on specific requirements, and families need to follow the applicable claiming process.
Understand the restrictions. Trump Accounts are designed for long-term savings, not unrestricted access to money at age 18.
A 529 is generally the better education-savings tool. Its tax treatment is designed around qualified education expenses.
A Roth IRA may be more attractive when a child has earned income. It offers different tax advantages and more flexibility around contributions.
A brokerage account may offer greater flexibility. It can be worth considering when the goal is to help a child build wealth without the same retirement-account restrictions.
Look at the whole financial plan. The best way to help children may not always be to put money directly into an account in their name.
Make your family's financial plan work for everyone
At Equilibrium Financial Planning, we help New Orleans families make thoughtful financial decisions that account for both today's priorities and tomorrow's goals. That includes evaluating tax strategies, retirement savings, investment choices, and ways to transfer wealth to the next generation.
If you're trying to decide how to save for children or grandchildren while keeping your own financial goals on track, a comprehensive financial plan can help you understand the trade-offs.
Learn more about Equilibrium Financial Planning: https://equilibriumfp.com/
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Episode 92
Eric: Welcome to episode 92 of Accessible Finance For Retirement. I'm Eric Johns.
Rachael: And I'm Rachael Johns.
Eric: Let's dive in.
Rachael: All right, Eric, today we are gonna talk about a new financial topic that parents, grandparents, and just about everyone who wants to help a child build wealth should understand.
Those are called Trump accounts.
Eric: Yes, ma'am. 530A.
Rachael: Correct. So you may have seen headlines about the government giving $1,000 for all the kids, and naturally, people have questions. So questions may range to who qualifies, is the $1,000 automatic, can grandparents participate, is it better than a 529, and then the biggest question, of course, is what happens when the kid becomes 18.
Eric: Sure.
Rachael: So let's start at the very beginning, Eric. What exactly is a Trump account?
Eric: A Trump account is a new type of account. I think the most analogous... Well, it was made to try to help children get a head start on retirement savings. Why would I say retirement savings? Um, bec- because they, and if they have access to the account when they turn 18, because, um, earnings in the account are still taxable as they would be for an IRA if they're withdrawn before age 59 and a half.
So they're made for kids, right? They're only creatable if your child is under 18.
Rachael: So a child.
Eric: Tax year in, right? And then- Okay ... and then they are subject to the restriction of earnings subject to tax-
Rachael: So it sounds like- ... and
Eric: penalty ...
Rachael: the goal is really just to get money invested early and give it a long time to grow.
Eric: Sure.
Rachael: But the families, I do think it's really important to understand what the restrictions are before putting your own money in.
Eric: Correct.
Rachael: All
Eric: right. Correct. Do we want the... No, we, we'll, we'll wait. We'll wait for my takes on- I was gonna say ... how useful these things are and when they- Let's
Rachael: ease our way into-
Eric: Sure, sure, sure
Rachael: restrictions.
Eric: Yeah,
Rachael: yeah. Okay. So first question, does every kid get $1,000?
Eric: No. Your child, what is it? Uh, you have to be born between January 1, 2025- Mm-hmm ... and December 31, 2028.
Rachael: Yeah. Exactly.
Eric: That is the requirement for the $1,000, and you need to file form, what is it, 4547, uh, with your tax return.
Rachael: So it's not automatic.
Eric: That is correct.
Rachael: And it only applies to those, that three-year window.
Eric: That is correct.
Rachael: Well, I guess technically it's four 'cause it's the beginning of five and the end of
Eric: eight. Five, six, seven. Yeah, you're right,
Rachael: four. So four-year window, and you get the $1,000. Um, and then again, that $1,000 is a one-time contribution, not like an annual-
Eric: That is correct.
Rachael: Okay Um, so if a child is born in 2026, they might qualify for the $1,000.
Eric: Yes.
Rachael: But then if I have a teenager who was born in 2010-
Eric: Right ...
Rachael: they would still qualify for a Trump account, even though they wouldn't qualify- They- ... for that government contribution.
Eric: That is correct. They're eligible to open a Trump account.
Rachael: Okay. So here's another question.
Eric: Okay.
Rachael: Um, I heard accounts started opening automatically in October. That's right. Does this mean that parents don't have to do anything?
Eric: They still have to claim the account. So the Treasury, there, there's speculation here, which I will refrain from doing or encouraging or entertaining, but the Treasury opened accounts on behalf of everyone that has not yet filed Form 4547.
I need to memorize that number. It shouldn't be that hard.
Rachael: You'll get there.
Eric: But it's new. Sorry. Thank you. There's a lot of numbers. That's a great point. Yeah. And thank you for the encouragement. Yeah, I got you. I, I truly appreciate that.
Rachael: Um- I'm nothing if not encouraging.
Eric: So, so if you haven't filed form 4547, and you have a child with a Social Security number that would be eligible for a Trump account, they were, the Trump account was automatically created by the Treasury, but they are unclaimed currently.
So the parent or guardian would still have to log in to, I, I think it's like, uh, what is it, trumpaccounts.gov, or, um, is that it? I think that's it, right? I think it is. Right now, that's the only way you can do it, I believe- Yeah ... uh, to go claim the account. But that's the idea. You go claim the account, and then you'll have an active account.
And- Or the account's already active, but it's unclaimed ...
Rachael: does this apply to both parents of children that fall into the contributory $1,000 window-
Eric: Yes ...
Rachael: and parents of those who-
Eric: My understanding is yes.
Rachael: Okay.
Eric: I believe you still have to file Form 4547 if you want the $1,000, though.
Rachael: Yeah, so it sounds like practically, don't assume- So-
that just because your kid would qualify, the $1,000 automatically happens.
Eric: That's correct. So to claim the $1,000, you need to file Form 4547. Even in a f- even if an account was claimed or was created automatically, you'll still need to file Form 4547, however, uh, to, to even gain access to it. So if you were eligible for the $1,000- Mm-hmm
and, and a, and but you didn't file form, the, the tax form yet-
Rachael: Yeah ...
Eric: um, you still need to file that tax form before you can, um, gain access to the account. Does that make sense? So- So if you're born in that window-
Rachael: Yeah ...
Eric: January 1, '25, or 2025 to December 31st, 2028- '28, yeah ... you still need to file that tax form to get access to your account.
But if you have kids that are older, out of that bracket, right? So like us, we have 11-year-olds. Right. They're, they're older than that. Right. So we would have to go to the other steps. We don't have to file the tax form. '
Rachael: Cause there's no money to, for
Eric: us to claim. Correct. There's no money to be gained- Sure
unless we're going to put it in ourselves.
Rachael: So let's say that you have a child who does qualify for the contribution. Okay. So a child within 2026 to 2028.
Eric: Yep.
Rachael: 2025 to 2028.
Eric: Okay.
Rachael: Yeah. Um, could I put in money? Could grandparents put in money?
Eric: Yes. There is an aggregate contribution limit of $5,000, but yes, you can, grandparents can, employer can, and then third parties can.
You know, you've heard about the Dell, um- The Dell ... Michael and Susan Dell- Yeah ... $250 contribution to- Employee ... kids in certain, you know, areas, and yeah. There's restrictions on who can do that and how they can do it.
Rachael: Sure.
Eric: You might have also heard Musk make a promise to give everybody a share of SpaceX in the account with a five-year lockup.
That's speculation at this point. Nobody knows if that's actually gonna happen, but-
Rachael: So employee contributions, grandparent contributions, parent contributions all go towards that same $5,000 limit, correct?
Eric: That's correct.
Rachael: Now, if your child qualifies for that $1,000, does that go towards that $5,000 limit this year as well?
Eric: That's a good question, but I don't believe so.
Rachael: Okay. So families shouldn't assume that they could just stack all these contributions on top of one another.
Eric: Correct. I'd love to say a lot right now, but I'm again staying refrained. Okay. Basically, like just because you can do something doesn't mean you should do something.
Um, and, and, and in my view, you, you very much should not- Mm-hmm ... want to do this. Like, it's not something you should want to do.
Rachael: We'll get there on your opinion. Yeah. Right now we're just doing facts, but-
Eric: Sure ...
Rachael: we have a very strong feeling.
Eric: My opinions are facts. Guys, come on. Let's be real.
Rachael: Okay. Well, so another important thing, right?
We've talked in previous, um, episodes about the importance of ensuring that you're, you have earned income to be able to contribute to, like, retirement accounts, right?
Eric: Yes.
Rachael: So is there a need with a Trump account for the child to have earned income in order to receive contributions?
Eric: No.
Rachael: Okay.
Eric: They're children.
Rachael: Well-
Eric: There, fair enough. Okay. Yeah. Touché.
Rachael: I think it's an important point. All right. All right. I think if you're looking up retirement accounts and things like that-
Eric: Yeah, no, that's fair. That's fair ... you're gonna see those. And if you're thinking, right, like, "Should I give to a Trump account or a Roth IRA?"
Like, that's- Exactly ... a pretty key distinguishing factor.
Rachael: Right.
Eric: The answer is always Roth, by the way, if they have earned income.
Rachael: Right.
Eric: It's not close.
Rachael: But that's the caveat, right? If you don't own your own business or so- it's harder to have- Correct ... your child qualify- I agree ... to be able to get earned income.
Um, so if grandma wanted to help her grandchild build wealth, then she could potentially explore, you know, contributing to this Trump account, correct?
Eric: It is legal. It is not an action- It is a- It is, it is an option.
Rachael: Okay.
Eric: That is certainly a decision that you can make, is what I would
Rachael: say. But it is important also to distinguish between the benefits that, you know, an individual would have between contributing to your own retirement accounts versus your, you know, children's- That's
Eric: correct
Rachael: as far as like tax deductibility.
Eric: That's absolutely true. And speaking of tax deductibility, since you brought it up, these are not tax-deductible contributions.
Rachael: Mm-hmm.
Eric: To be clear, these are not tax-deductible contributions.
Rachael: And for someone who loves to optimize-
Eric: Yes ...
Rachael: tax strategies, I'm sure that that is, um, you know, a prickly-
Eric: That's correct
Rachael: thorn for you. Yeah.
Eric: There are two use cases, and I will gladly talk- We'll get there ... about them later. Yes. I know. I'm being- We'll get there. I'm being, I'm on a leash, guys.
Rachael: Yeah. We're
Eric: learning, Mary. I want y- I just want everyone to know this is very tough for me right now.
Rachael: We're just- we're trying to lay out what the rules- Correct
and restrictions are before we go into- Absolutely ... you know, weighing in on, on use cases.
Eric: Very prudent, Rachael. Very
Rachael: prudent. Thank you. Thank you, thank you. Um, okay. So we've talked about who contributes, limitations, who qualifies. Um, so let's talk about investments or investing, right?
Eric: Yes, ma'am.
Rachael: So is this like any other brokerage account where you could buy whatever stocks you want?
Eric: No, it is not. Everything is on the rails. Um, right now there are supposed to be four options, or supposed to be. There are announced to be four options. My understanding as of, where are we? Like, late October. Mm-hmm. There is one eligible option. What is it? It's SPY. It's like the SPY S&P 500, right? I, I looked it up on the way here.
I'm sorry. I should have, I should have memorized. But it's got a- I don't care. You don't have to remember it all ... it's got a two basis point expense ratio, and it's an S&P 500 ticker. Um, so US S&P 500- Yeah ... it just means large cap, largest 500 companies in the United States. That's the only eligible fund that you can currently choose.
Mm-hmm. But there are options to make it, um, there's, they're gonna a- add Vanguard's US Total Market, which is VTI, so that in- would include US mid and small cap, and then they're going to include, um, I think an iShares total, US Total Market as well as, I think it's one more S&P 500 ticker. So m- honestly, it's, it, it's mostly six and one half.
Those funds are gonna be very highly correlated. It's gonna be US equities.
Rachael: Yeah. It does. It's, it's SPY. You're correct. It is the State Street, um, S&P 500.
Eric: Mm-hmm.
Rachael: Um, and that's kind of the default fund, it looks like- Right ... unless you opt into something else.
Eric: Correct.
Rachael: Um, okay. So then-
Eric: So yeah, it's very s- it's much more similar to a 401where they w- where, where you will be presented with a curated list of options, right?
So you, and then you get to select from those options- Yeah ... which you'd like to put the dollars in. M- currently, that list of options is one option. It's a fine option. I'm not, I don't have any issues with that option though, right? Yeah. Like, US large cap is completely sensible. Love it. It's good.
Rachael: Yeah. And we're talking about putting in funds that have- I mean, putting money in that has a very, very long time horizon, right?
Eric: That is correct.
Rachael: Um, okay, now to be clear, this is different than investing in, like, a money market or a bond in that-
Eric: Oh, absolutely ...
Rachael: it will fluctuate with... You know, I think oftentimes when people are investing for kids, especially if they're unfamiliar or feel like they're investing through, like, a, a government-
Eric: Right
Rachael: you know, fu- you may think it's more like a money market, but this is indeed investing in the stock market, and it can go down like any other-
Eric: That's correct ...
Rachael: investment.
Eric: We've definitely heard that concern from clients as well is- Yeah ... "Hey, I wanna put, set this money aside for my child or my grandchild- Right
and I wanna make sure that this money's there when they need it."
Rachael: Yeah.
Eric: So.
Rachael: It is interesting. I do think that, you know, this is a slight caveat, and we're gonna do an episode on risk tolerance in, like, particular later on, but I do think that oftentimes the risk profile that parents or grandparents or providers have for their kids is very different than their risk profile for themselves, which is interesting.
Eric: Yeah,
Rachael: I agree. Giving up the children typically have-
Eric: Longer time horizon. Correct. Much longer.
Rachael: Yeah, so the risk could and arguably should be higher, not lower.
Eric: Correct.
Rachael: Um, so okay, yeah. I think it's important because, you know, when people hear the government is giving you a, $1,000 for your kids, to understand that the balance there is not guaranteed because over time, depending on how it's invested and what the market does, it could go down.
Um, it's just a contribution that's defined, not necessarily the future value.
Eric: That's correct.
Rachael: Um, okay, so this is probably the question that I would want answered before I put any of my money in for one of my kids.
Eric: Okay.
Rachael: Is, at the point in time that my child turns 18, what happens?
Eric: The account is converted to a traditional IRA account.
That's what happens. Do you want to know what that means? No?
Rachael: Give us- No, no, no. Yes. Give us the-
Eric: She went like this
Rachael: Um, sorry I was-
Eric: For those listening, I'm indicating that she's shaking her head like this, side to side, just indicating no.
Rachael: Okay. Okay. I, I was going to-
Eric: Unbelievable, Rachael ...
Rachael: I was going to, it depends you.
Like, yes,
Eric: but- But it depends on how long my answer
Rachael: is? Menus with the, with menus with the details.
Eric: Oh, come on. You're no fun. Um, I'm kidding. You are fun. Give, give
Rachael: us- You're great ... give us the big stuff.
Eric: Okay. So- The
Rachael: important things ...
Eric: right. So it's converted to a traditional IRA, and you're going to have basis for your contributions, which means we have, we need to track, to the extent that you're gonna use this account, I will talk about that later, but, um, to the extent that you're going to use this account, you need to track all of your contributions so you know what you've already paid tax on, because all of the earnings of the growth of those, uh, contributions will be taxed at ordinary income rates when they come out.
Now, if- And if it's prior to 59 and a half, that's when you will pay the ordinary income tax as you would post 59 and a half, but you'll also pay a 10% penalty.
Rachael: Now, if there's one thing we know about people, it's that tracking contributions and tax treatment year over year-
Eric: Right ...
Rachael: is really exciting.
Eric: It's going to be a nightmare.
Rachael: I, I think that it's important to understand what the ask is beyond like, "Yay, we get $1,000", right? I also think it's important to distinguish, you know- That this is not the account where you're putting money in for your kids to, you know, pay for their wedding or get their first car or get their first house,
Eric: right?
Right. Like,
Rachael: we're not talking about funds that are intended for entry into adulthood.
Eric: Yeah. Ben Henry-Morland did a really good, um, ar- he wrote a really good article and then did a podcast, um, with Adam Van Duuren on the Kitces, on the Kitces blog about these accounts, like 530a accounts or Trump accounts and their use cases.
Mm-hmm. And a lot, the, the, the summary there is that the use cases for a Trump account overlap significantly with other account options that are currently available.
Rachael: It's almost like you knew exactly what I was gonna ask you next.
Eric: Oh, sorry. Fair enough.
Rachael: No, that's not a g- Go
Eric: ahead ...
Rachael: that's perfect. You segued me right into that.
It feels like naturally, right, the next logical question becomes, so how does the Trump account compare to other accounts that we have talked about and identified, such as the 529-
Eric: Mm-hmm ...
Rachael: or a Roth IRA?
Eric: Yeah.
Rachael: What are the comparisons and then the use cases for those?
Eric: Great question. Um, so Roth IRA accounts are also, they both use after-tax dollars.
Mm-hmm. So I will get no tax deduction, like I will not reduce my taxable income for a contribution that I make to a Roth IRA-
Rachael: Mm-hmm ...
Eric: in the same way that I will not reduce my taxable income by any contributions that I make to a Trump account- Mm-hmm ... or a 530a account, right? The growth in the Trump account, even if it's a qualified distribution, is going to be taxable at ordinary income rates.
Does that make sense?
Rachael: Mm-hmm.
Eric: Like do you feel like there needs to be explanation there? Ordinary income rates are always higher than capital gain rates, okay? So you might ask yourself, and this would be a fair question, why would I contribute to a Trump account if, let's say I contribute $1,000. Yeah. Okay?
And then my child does nothing with, like just lets it compound. It's sitting in an S&P 500 ticker. It compounds, you know- And it's, now it's worth $10,000, okay? When they wanna take it out at age 59 and a half.
Rachael: Mm-hmm.
Eric: Probably worth more, but point is, let's say it's $10,000. There's a $9,000- there's $9,000 there that are taxable now at ordinary income rates.
Rachael: Mm-hmm.
Eric: What if I had bought $1,000 of insert stock here or here, we can use SPYM, in a just taxable brokerage account?
Rachael: Mm-hmm.
Eric: Well, first, if I buy it and then I pass away and my kids get it, they get a full step-up in basis. Yeah. Wow, that's good. That's huge. Um, that's pretty cool.
Rachael: Yeah.
Eric: But also, let's assume that they, we buy it in, um, in a custodial account for the child.
Rachael: Mm-hmm.
Eric: Okay? Yeah. We, we spend $1,000. It's now worth $10,000 when they're 59 and a half. It was in their name the whole time. Mm-hmm. So there was no step-up in basis, even if we pass, right? So they get the $10,000, and there's $9,000 of capital gain. What happens there? Oh, well, they pay potentially, let's call it, like, 15%- Yeah
capital gains tax versus what might be 22% or 24%- Mm-hmm ... ordinary income tax. Mm-hmm. So you might ask yourself, why would you use this if it's restrictive and it doesn't offer a significant upside? And that's a great question. That's a great question.
Rachael: So-
Eric: Um, I'll, I'll give you two use cases, but first, sorry.
Rachael: Yeah, yeah.
Eric: I, I'm editorializing a bit much. I-
Rachael: no, I think, but I think that's what I'm asking
Eric: for at this point. But that's kind of the- 'Cause I think- I, I also think that's kind of the point, right? Yeah. Like, you're listening so that you know when you should use it, and the answer is that.
Rachael: Well, and I think, you know, we laid out and addressed what the Trump account is, right?
But we've talked about the fact that the 529 is an excellent tool for saving for college or higher education, right?
Eric: Right. Sorry, I didn't do a good job
Rachael: of- Is the 529 still, in your opinion, the best fit for that purpose compared to a Trump account?
Eric: Absolutely. Okay. Unequivocally, yes.
Rachael: Okay. And
Eric: so- So 529, you'll get a little bit...
You could, you could get a state tax deduction depending on what state you live in. For Louisiana, you will get a state tax, tax deduction, which means it's not super significant, it just means you don't pay state income tax on the percent that you're, um, contributing- Mm-hmm ... to a 529. So it's roughly, like, a 3% of the Lu- Louisiana state tax that you're avoiding.
Rachael: Yeah.
Eric: Does that make sense? So- So for every $1,000, you save $30. Yeah. You're gonna get, you're gonna pay $30 less of taxes for every $1,000 you contribute to a 529 for
Rachael: Trump. But, but we've talked about the fact that psychologically, people are willing to spend-
Eric: More money-
Rachael: Almost, yeah, almost- ...
Eric: to avoid taxes.
Yeah.
Rachael: Two, $2- People do not like taxes ... to save $1 in taxes.
Eric: That is
Rachael: correct. So saving any amount in taxes could be something that psychologically feels- Oh, absolutely ... like a huge win- Absolutely ...
Eric: even if it's
Rachael: minimal.
Eric: And then so the th- the upside of a 529 as opposed to a Trump Account- Yeah ... again, is the 529, the growth that occurs within the 529 account, um, is tax-free- Mm-hmm
if it's used for qualified education. So you have even better, you have essentially Roth treatment, right? Yeah. Tax-free growth treatment if it's a qualifying expense for that account. Mm-hmm. So Roth, it's only tax-free if it's a qualifying distribution from a Roth account. For a 529, it's only tax-free if it's a qualifying distribution from a 529 account, which typically is going to be paying for education.
Rachael: So, like in our scenario, right, Eric? Yeah. Like, we've got 11-year-olds.
Eric: Okay.
Rachael: And let's say that they're earning income from a legitimate job. Like, they might do, you know, they do with us, but-
Eric: Okay ...
Rachael: they, you know, a teenager, whomever, they're, they're earning money from a legitimate job. Would your, how would you think about contributing to a Roth IRA versus a Trump Account?
Eric: It's not a decision. It's s- it's simply, like, in my mind, like, I don't, you know how it's, like, a lot of the answer is it depends, and I will be very hesitant- Give a- ... to give a firm this is objectively correct or incorrect statement.
Rachael: Does it depend for you here?
Eric: No, not at all. Yeah. You go Roth all day.
Rachael: Okay.
Eric: This, yeah, you go Roth all day. Do we wanna hear, like, use cases for this, or- I will, but so- I'll, I'll hold. All right. All right. Roth all day because they'll have access to their contributions, always tax and penalty-free. So if I contribute $7,500 to a Roth- Right ... it grows to 10K. Well, I can't withdraw all 10K because I'm not 59 and a half yet, so it's not a- Sure
qualifying distribution, but I can withdraw the $7,500 tax and penalty-free.
Rachael: So it sounds like the Trump's, like, pilot $1,000 is what really opens up the worthwhile for investigating for people, right?
Eric: There are two use cases.
Rachael: Is that one of them?
Eric: That is one of them.
Rachael: Okay.
Eric: I will stop now- Um ... until you tell me I can talk about my next.
Rachael: S- so yeah, I do think that it's important to think about things like, you know, opportunity costs and what your desire is for the dollars you're putting into any kind of investment vehicle for, um, your children. Mm-hmm. Um, okay, so let me give you a hypothetical-
Eric: Sure ...
Rachael: that might help contextualize this, and then we can go into the two use cases.
I know. I know. That's all he wants to do. Um, okay, so a couple has a newborn who does qualify for the $1,000 government contribution. Yep. They have a healthy emergency fund. They're saving adequately for retirement. They're also contributing to a 529 already.
Eric: Great.
Rachael: Um, should they then also put money- Nope
into the Trump Account? What things- Uh, wh- why?
Eric: What, you want to ask about the criteria here? Because it's objectively worse than every other vehicle for every other point in life.
Rachael: So but let's
Eric: say- Does that make sense? ... they're
Rachael: maxed out their 529.
Eric: Yep.
Rachael: Right?
Eric: Mm-hmm.
Rachael: So if they have money they want to direct to their child-
Eric: Yep
Rachael: and you're saying no to the Trump account, what is your next advocacy then? What are, what are you advocating instead?
Eric: Have they ma-- You said they've maxed out their five twenty-nine. Yeah. Have they done Roth conversions? No. Have they, or have they contributed to their own Roth accounts, for starters? That's objectively better.
Um, if you've-- Basically, like, the use case for... Well, sorry. It's-- there isn't one. Invest in a brokerage, and then use that. You'll at least-- Even if the account goes down in value, it was gonna go down if it were a Trump account or a brokerage. Yeah. You at least get to harvest the losses in a brokerage. You can use that.
You will have capital gains treatment on the gains that you have access to whenever you want. There's no restriction on fifty-nine and a half, which is likely to be when kids are getting their inheritances. Because if you think about how old the kids are or how old you are- Yeah ... when your kids are fifty-nine and a half, you might not be around that much longer, which means they're gonna have a huge influx of dollars- Mm-hmm
which means that, that's the least likely for them to actually need the dollars, and there's tax on the growth there.
Rachael: Yeah.
Eric: Right? So traditional IRA, nondeductible traditional IRA, um, contributions, right? Which is essentially the same as a Trump account contribution. Mm-hmm. They're viable for Roth conversions.
We use it as, when we call it backdoor Roth. We make a nondeductible contribution to a traditio-traditional IRA, and then we immediately convert it.
Rachael: So is there a restriction then on converting Trump accounts to Roths-
Eric: Pre- ...
Rachael: pre, pre eighteen?
Eric: Yeah. They're not, they're not traditional IRAs, so there's no conversion there.
Rachael: So it's not until a child has turned eighteen that they would even have the option of doing it. So
Eric: that is correct. So that option is eliminated, right? So, so you're restricting a bunch of your opt- Seems very restrictive, yeah. You're restricting a bunch of your optionality, right? With the, with the money.
Like, it's tied up essentially with the, you know, without penalties. Like I guess you could rip it out and take the ten percent penalty, but that's true for almost anything. Right. Um, for any type of account. So you're restricting your optionality for objectively worse tax treatment. Does that make sense?
And a restriction on the investment. To be clear, I'm not taking huge issue with what they've chosen to invest in, US large cap stocks or US total market. Yeah. It
Rachael: honestly says a lot- Fine with that ... 'cause you tend to be-
Eric: Yeah ...
Rachael: pretty
Eric: hard- No, like, like look, putting it in low-cost ETFs, fantastic.
Rachael: Yeah, not a bad.
Eric: Absolutely good. We're
Rachael: good. So it sounds like the only compa-
Eric: But it's still more restrictive than being able- Yeah ... to invest internationally and diversify
Rachael: in small cap. It sounds like the only competitive advantage that the Trump accounts have is that thousand dollar pilot option for-
Eric: That's, that is correct, and one of the two.
Rachael: Okay. Um, okay. Um, like my wheels are turning trying to come up with a second, but I don't think I could. But, but-
Eric: You probably could.
Rachael: Very quickly- You're a smart
Eric: lady ...
Rachael: well, like you've capped out everything else. Like there's just no more dollar. You filled, funded everything else. I do think that if- Someone finds themselves in a fortunate enough position to want to fund a variety of things for their kids, it doesn't necessarily mean fund every avenue of things for children, right?
Like, it doesn't mean that you need to fund everything in your child's name, right? Particularly since you've discussed, like, the step-up in basis that happens.
Eric: That's, that's a conversation that we regularly have. Yeah. Right? Essentially, like, parents will say, like- I want this in my kid's name ... "I really want this money in their name right now."
Right. And I'm like, "Well, are you planning on exceeding the $19,000 a year, current year-
Rachael: Right ...
Eric: gift- Right, right, right ... annual gift exclusion anyway?" And they're like, "Well, no, not really. Like, I don't really have that much extra money lying around." I'm like, "Then why not keep the money- Mm-hmm ... and then hand them 10 grand when you think they need 10 grand, right?"
Rachael: Yeah. Like,
Eric: they
Rachael: don't need it. I think ultimately it's important to think of the accounts that involve your children as still part of your broader financial plan rather than a sectioned-off, like- Separate thing. Right. Because if there's a better use in your financial plan that still benefits them, that's not necessarily in their Social Security number-
Eric: Yeah
Rachael: that's an okay thing.
Eric: There, and this is, this is where an it depends makes sense. Yeah. Like, when we're talking about a custodial brokerage versus retaining the money in your brokerage, which I, I seemingly just advocated, there are situations where you'd rather pass some assets sooner than later so that, and, and this, and, and more- most of that will revolve around how much the tax imp- the, what the tax consequences are of those, uh, assets to you.
Does that make sense? So if I am in, like, the 37% tax bracket, right, I might wanna start passing assets off so that instead of paying an ordinary income tax- Sure ... on interest income of 37% plus the 3.8% net investment income tax and 3% state, I now- It adds up quick. I'm sorry, what?
Rachael: It adds up quickly.
Eric: Right.
Right, right. Yeah. So, like, that makes sense. Like, okay, sure, then at that point when we're, you know, we have significant amounts of assets, significant amounts of wealth, we might wanna consider transferring it, getting some of that tax off of our, um, tax return- Into, into... Yeah, yeah, yeah ... and onto the kid's tax return.
Rachael: Okay,
Eric: but- However, that only matters once they're 18 plus, right? So let's- 'Cause you're gonna have the kiddie tax
Rachael: until they're 16 ... delve into and kind of wrap up our big, um, discussion, right? So we've hit what the Trump accounts are, what the restrictions are, and now I think it's important to delve into those two use cases.
You've said that the use case number one is if you are someone with a child-
Eric: Yeah. They're giving
Rachael: you money ... or grand child, exactly, s- who is born between-
Eric: Don't look the gift- ...
Rachael: January
Eric: 2025 ... a gift horse in the mouth. Is that right?
Rachael: Yeah. Look at you. Yeah. So if you- I
Eric: don't understand that ...
Rachael: qual- if you qualify, I-
Eric: Do you wanna take a brief detour and talk about why that phrase existed?
Rachael: Do you know why it existed?
Eric: No, I have no idea.
Rachael: Okay. You- I have no idea ... start talking about the second use case- It
Eric: doesn't- ... and then I'll look it up ... it doesn't make any sense to me.
Rachael: I will say it drives me crazy when they have sayings like that and we don't know what they are, and I will frequently look them all up at the dinner table, much to my children's dismay.
But we will find the origin out for everything. So okay, use case number one is you qualify for the $1,000, okay? Yes, absolutely. This, again, you can get the $1,000 without contributing any of your own funds. Well, that's
Eric: right.
Rachael: Okay. So use case number one. Eric, what is the-
Eric: Take the
Rachael: free,
Eric: take the $1,000
Rachael: second one?
Eric: Um, the second use case is if your child is near 18, okay? Mm-hmm. Your child needs to be close to 18. Why is that? Because you want to be able to contribute and then convert Right? So what we're trying to do is we're trying to get more money into the child's Roth IRA, because a Roth IRA is objectively better in every way.
Rachael: Sure.
Eric: Right? So, the, you could- never mind, we're not gonna go there. I was thinking, like, maybe somebody could conjure up some scenario that's ludicrous, but, like, I don't think that's true. I, I honestly believe that a Roth IRA is better in every way. If
Rachael: you have one that you would like to conjure up-
Eric: Yeah, write in.
Yeah. Talk to me about it. I'm
Rachael: happy. Podcast@EquilibriumFP.com. Call me. We would love to be able to weigh in on this. Yeah. Let's
Eric: chat.
Rachael: Yeah. So if you're like, "Huh, I wonder about this"-
Eric: Right ...
Rachael: definitely send it
Eric: in. So the idea is, like, okay, so I have- I'm contrib- I've maxed out all my own stuff.
Rachael: Sure.
Eric: All right?
And I wanna get assets to my kids.
Rachael: Sure.
Eric: All right? And they're close to 18.
Rachael: Okay.
Eric: And I've already got... And they don't have earned income, so I can't just directly give to a Roth IRA. Or maybe they do. Like, maybe they have earned income, and I'm contri- I'm giving them the, I'm handing them the money. Yeah. I'm gifting them the money to contribute to their own Roth IRAs.
Rachael: Got
Eric: it. Right? Which is also a strategy that all parents should do. If you have the extra cash and you're trying to figure out what to do with it 'cause you wanna pass it to your kids, what you should do is say like, "Hey, guys, I'm gonna hand you this check, and then what I need you to do is put it in your Roth IRA."
Rachael: Yeah.
Eric: Does this make sense? For sure. Like, so that's what they should do. But the idea is, like, I've already done that. They've already maxed all that stuff.
Rachael: Yeah.
Eric: Like, we've already checked basically every other box. Mm-hmm. And now we're like, how can we just hammer more money to our kids?
Rachael: All right. So if you are King Midas-
Eric: Yeah
Rachael: and you are just looking for more- Right ... tax-advantaged opportunities.
Eric: Then what I'm gonna do is I'm gonna contribute 5K at age, you know, 17, maybe again at 18. Mm-hmm. And then I'm gonna convert the 10K.
Rachael: To be clear, to be clear, it sounds, though, like it's still the last resort in use case number two.
Eric: Yeah.
Rachael: You've done everything else.
Eric: Mm-hmm.
Rachael: So-
Eric: But at least it's got a case.
Rachael: For sure. Uh, for sure, for sure. Um, but yeah. So for the general public- So- ... it sounds like it's really not
Eric: And I-
Rachael: The most appealing-
Eric: That's correct ... option available. So just to be clear, um, I know this is gonna be difficult to follow, but I wanna just articulate what I mean by you wh- why you would wanna do it so close to 18 in proximity, okay?
It's 'cause first, the curated funds that are going to be on that list, remember we talked about- Yes ... the list of the four curated funds, they're all going to be high expected return.
Rachael: Yeah.
Eric: Okay? So what that means is we're expecting to be generating a high amount of ordinary income on the account, like in the account- For sure
or potential ordinary income. Mm-hmm. And so when I convert to a Roth, I can't... Remember Ro- uh, Roth IRA pro rata rules? I'm sorry. We did pro
Rachael: rata and aggregation.
Eric: Roth conversion, that's exactly right. Yes. Pro rata and aggregation rules means that-
Rachael: We have an episode about that somewhere.
Eric: Means that- In the past
I can't just, if I said two years, right? I contributed 5,000-
Rachael: Sure ...
Eric: uh, when they were a child, 17, 5,000, child's 18. Now it's a traditional IRA. Yeah. Now I wanna convert it, okay? If my account is $10,000-
Rachael: Okay ...
Eric: and I've contributed $10,000, I should pay zero in tax.
Rachael: Got it.
Eric: Does that make sense? Yes. But if I've contributed $10,000, my account is now $30,000- Right
'cause I've left it there for a long time. Now can I, I, I cannot just convert the 10K and be like, "Hey, guys, leave the 20K in my traditional. I just wanna convert this 10,000, or 10,000 of contributions to a Roth." I can't do that.
Rachael: So this is why having, you know, giving it, like if your child is three and has missed out on the $3,000 window, they're probably not the best child to start making contributions because- Right
it's gonna grow a
Eric: while before- No, that's exactly it. Okay. That's exactly correct.
Rachael: That makes sense.
Eric: And we'd rather, again, we'd rather just ordinary, uh, just regular taxable, I mean, regular capital gains treatment- For sure ... on those assets, which is just a brokerage account. So- Don't need anything fancy there.
If you have- But the point is- ...
Rachael: your own scenario or your own situation where you're like, "What should I be thinking about?" Please feel free to write in. Yeah. We'd be happy to discuss it in a follow-up episode- Absolutely ... about Trump accounts. I know it's complicated, and it's really hard- To say no to this-
Eric: But I have to talk more, Rachel
Rachael: would you like that? Okay. Well, I have our answer about the, the horse.
Eric: Ooh, we gotta get there. So- But hold on. But- We gotta wrap up ... real quick. So like we had talked about if the, if I contributed 10K, the account's now 30K, that means there's- Sure ... 20,000 of growth. If I wanna now convert that to a Roth IRA- Yeah
I have to pay ordinary income tax on $20,000. Does that make sense? So the difference between my contributions and the current, uh, growth, so th- there's only 10K of non-deductible contributions. So my basis is 10,000, and I'm converting 30, I gotta go pay ordinary income tax on 20K. And this is what you've
Rachael: had to keep records of to prove that, right?
Eric: That's correct. You need to- If you- ... keep records of your contributions or you're paying tax on the whole thing
Rachael: If you haven't, I was gonna say, if you haven't been keeping good records, which w- we should know ourselves at this point, if you're not a, you know, spreadsheet, record keeping kind of person-
Eric: That's a great point
Rachael: if you can't substantiate the 10,000 that you contributed, you're not paying ordinary income on 20, you're paying it on the whole thing.
Eric: That's right. And it's also, it's also another, um, another point in favor of the-
Rachael: Other accounts.
Eric: Well, sure. Right. But also, like, doing it close to 18. For sure. You don't have to track it for as long.
That's true. That's so true. You only have to track it for one or two years as opposed to- That's true ... you know, 18.
Rachael: Yeah, exactly. So again, new account, for sure do your own research, talk to the people that you trust in your life, talk to your financial planner. Um, but to be clear, it is very new. Most people don't know.
Um, he loves listening to, to podcasts no matter where we're going, um, and doing research. So, um, trust this guy. Um, all right. That was
Eric: very nice.
Rachael: Thank you. The background, quickly, behind looking a gift horse in the mouth is that, um, in historical horse trading, buyers would check a horse's teeth for wear, length, shape, et cetera, to estimate their age and health.
Oh. But if an, if the animal's being given to you as a gift from somebody- Right ... inspecting the horse was considered-
Eric: Yeah, that
Rachael: makes sense ...
Eric: bad form. I get that.
Rachael: For sure.
Eric: It's kinda like counting, like, an envelope of money that you're just given- Exactly ... for
Rachael: like a
Eric: birthday
Rachael: or something. Exactly. You've gotten birthday money- So-
or wedding money, and you open it up and count it in front of them. Right. Exactly. So- That's a good
Eric: point ...
Rachael: it's implying that you're basically testing the financial- Being rude ... worth of, like, what somebody's given you, so.
Eric: Great point.
Rachael: The more you know. I need the, oh, I'm gonna do the ding. Yeah, yeah. Um, all right.
Well, on that note, um, Eric, thank you so much for having answers to my Trump account-
Eric: No, I'm excited. This
Rachael: is fun ... um, information, and for preventing me from having to research all of that- ... on my own. Glad to do it. So if you- Happy to help ... have questions about how a Trump account might fit into your family's financial plan, or questions about anything else, visit equilibriumfp.com, or send us an email at podcast@equilibriumfp.com.
Eric: Thanks, guys.
Rachael: Till next time.
