530A Accounts - "Trump" Accounts
I’m sure you have heard some rumblings from family, friends or the news about the new “Trump” accounts for children. The technical term for these accounts is a 530A account as this is the specific section of the Internal Revenue Code that these accounts are written into the tax law as. These accounts are now live and available for parents to decide if they would like to open one up on behalf of their children.
Before getting into this topic, I do have to emphasize that this is not a political post. The purpose of this blog is to provide parents with the best possible information and resources for making sound financial investing and wellness decisions for their family. In the spirit of the mission of this blog, I therefore could not ignore this topic as I do believe that there are benefits of these accounts for some parents that cannot be overlooked. Again, your goal should always be to make decisions that are most beneficial for your family and sometimes that requires you to understand what is going on in the political sphere. Whether we like it or not, politics do impact the US economy and your money directly and therefore it is really important that we take the time to research and understand laws and legislation so that we know how we can better protect and continue to grow our family’s assets.
FAQ #1: What is the 530A or “Trump” account?
A "Trump" Account is a new type of traditional individual retirement account (IRA) established for the benefit of an eligible child. During the child's growth period, the account is invested in eligible U.S. equity index funds, allowing money to grow tax-deferred for the child's future.
FAQ #2: Who is eligible for one of these accounts?
Any child under the age of 18 in the U.S. with a valid social security number is eligible for one of these accounts; however, only children born between January 1, 2025 and December 31, 2028 will receive the $1,000 seed investment into the account from the U.S. government.
FAQ #3: What are the account balances invested in?
The law generally requires that all “Trump” account investments are invested in mutual funds or ETFs that track the S&P 500 or another index primarily consisting of U.S. equities. So you aren't going to be able to put the account into individual stocks, crypto, international funds, bonds, etc.
FAQ #4: Is there a maximum amount that can be invested into these accounts each year?
Yes - $5,000 per year is the maximum amount that can be contributed to these accounts each year. This funding can come from anyone, so it does present an opportunity for relatives or friends to contribute to the account for your child.
FAQ #5: Are contributions made to the account tax deductible?
No - These contributions are not tax deductible like contributions to a traditional IRA are.
FAQ #5: When can the funds be accessed?
Funds can be accessed without paying a 10% penalty for certain qualifying expenses once the child turns 18. The account essentially turns into a traditional IRA once the child turns 18 and thus follows the taxation rules of a traditional IRA. See FAQ #6 below.
FAQ #6: What can the funds be used for and how are they taxed?
Funds can be used for certain qualifying expenses without paying a 10% penalty once the child turns 18. Examples of these qualifying expenses are just like that of a traditional IRA: educational expenses, first time home purchase, medical expenses, etc.
Withdrawals from the account, even for qualifying expenses stated above, are taxable at ordinary income tax rates, just like a traditional IRA. This means that the investment earnings aren't taxed each year that the account is held; instead they are taxed at the time of withdrawal like a traditional IRA. There is no annual tax on dividends, interest, or capital gains occurring inside the account.
Non-qualifying expenses will trigger a 10% penalty if funds are used for them before the child reaches retirement age.
FAQ #7: How does this account compare to a 529?
Money that is invested into a 529 account can only be used for qualifying educational expenses. The money that is invested into a Trump account is more flexible in that the funds can be used for other purposes without paying any kind of penalty. For example, money invested in a “Trump” account can be used by your child in their early adulthood to purchase their first home.
I don’t recommend that funds from the “Trump” account are used for educational expenses because qualifying educational expenses can be paid for from a 529 account tax-free vs. withdrawals from the “Trump” account are taxable as ordinary income.
FAQ #8: What are the pros and cons of opening one of these accounts?
Pros | Cons |
Free $1K from US government for a child born in certain time period | Withdrawals taxed as ordinary income like a traditional IRA |
Any U.S. child under the age of 18 is eligible | Withdrawals used for educational costs are taxed |
Anyone can contribute to the account on behalf of your child, up to the max | Only $5K max per year can be contributed |
Invested in diversified U.S. equity index funds | Contributions to the account are not tax deductible |
No annual taxation | No access to the funds prior to the child turning 18 |
Child does not need to have earned income to invest in the account | 10% penalty for non-qualifying expenses before 59.5 years old |
Qualifying expenses after 18 do not trigger a 10% penalty | Investment returns in the market are never a guarantee |
FAQ #9: How do I open a “Trump” account?
You can elect to open a Trump Account for your eligible children using IRS Form 4547. You can fill out and submit the form right in the Trump Accounts app (linked in the appendix below), when you file your taxes, or through the secure IRS website called Individual Online Accounts.
Overall Recommendation
From my personal perspective after reviewing the pros and cons of the account, I do think that any parent that has a qualifying child born between January 1, 2025 and December 31, 2028 should open one of these accounts. At the bare minimum, the $1,000 contribution from the U.S. government is free money for your child that will grow over 18 years as it is invested in the S&P 500.
If your children were born outside of this window, however, I believe that there is still a potential benefit to opening one of these accounts for your children because it provides you with the opportunity as a parent to contribute to an account that is invested in the S&P and does not require your child to have earned income in order to open the account. Recall that a traditional and a Roth IRA both require your child to have earned income to contribute. Therefore, this could be a way for families to begin investing for their kids before they are of working age. However, if you do have to choose between opening a 529 and a “Trump” account for your child, I would lean towards the 529. This is because 529 funds can be used for a large variety of educational costs tax-free, while the funds withdrawn from a “Trump” account in the future are taxed as ordinary income, even if the funds are used for educational expenses.
Ultimately, this decision is a personal one and there are many investment options out there when it comes to saving for your child. For more information about the “Trump” accounts, I have linked a few helpful resources in the appendix. These accounts are still quite new and I do expect more information about them to continue to be released over the coming months and will share these resources as I see them.
Appendix:
Trump Accounts Website - https://trumpaccounts.gov/
Legislation on the accounts - https://www.congress.gov/crs-product/R48910
IRS website - https://www.irs.gov/
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