Dear Clients and Friends,
This Independence Day was a memorable one for our country. The nation celebrated our 250th birthday with countless fireworks, block parties, and multiple FIFA matches. But this Independence Day also ushered in a new era of universal savings for children: as part of the One Big Beautiful Bill Act (OBBBA) passed last year, the creation of Trump Accounts (530A Accounts) became official on America’s birthday.
These tax-advantaged accounts will be funded with a mix of pre-tax and after tax dollars and will grow on a tax-deferred basis until the child turns 18. At that time, the newly minted adult can use the funds without penalty for qualified expenses such as education, a first home purchase, or starting a business. Withdrawals will be taxed at ordinary tax rates, very similar to how traditional IRAs are currently treated.
Family, friends, employers, and even the federal government can contribute to these accounts. There are several nuances associated with the various types of contributions, and each have their own respective rules.
Federal Government Seed Money – This is a one-time $1,000 gift to any child born between January 1, 2025 and December 31, 2028. This gift is considered pre-tax dollars and does not count towards the maximum contribution limit.
Parents, grandparents, everyone else – a $5,000 maximum contribution limit each year until the child turns 18. This is considered after-tax dollars.
Employer Matching – A maximum of $2,500 per employee. This is a part of the $5,000 maximum and won’t count as taxable income to the employee.
Charitable Organizations & State / Local Governments – these contributions would not be counted towards the $5,000 limit. For nonprofits, Donor Advised Funds and foundations are fair game as long as they choose a class of beneficiary and the government gives their stamp of approval. Think the Dell Foundation and Dalio Philanthropies.
I had Gemini AI craft a table that compares the ins and outs of Trump Accounts with other commonly used custodial accounts such as 529s, UTMA/UGMAs, and Roth IRAs.
Feature / Purpose | Trump Accounts | 529 College Savings Plan | UTMA / UGMA Custodial | Roth IRA for Minors |
Government Seed Funding | $1,000 one time | None | None | None |
Annual Contribution Limit | $5,000 maximum per year | $19,000 per donor or $95,000 front loaded (5 years) | $19,000 per donor | < of $7,500 or 100% of the child's pre-tax earned income |
Corporate Match Option | Up to $2,500 tax-free from employers | No | No | No |
Income Requirement | None | None | None | Required. Child must have earned income |
Distribution Rules | None before 18 Post 18 = same rules as pre-tax IRA | Tax-free for qualified educational expenses | Unrestricted | Contributions = anytime Earnings = earnings can be withdrawn tax-free at age 59½ |
Ownership Shift | Age 18. Converts to a traditional IRA in the child's name | Owner retains control | Age 18 or 21 (depending on state) | Age 18 or 21 (depending on state) |
Impact on Financial Aid | Child asset - up to 20% of value is counted against aid | Parental asset- up to 5.64% of value is counted against aid | Child asset - up to 20% of value is counted against aid | Minimal |
An important detail not listed above is that a beneficiary / child can only have 1 Trump Account. If another Trump Account is created for the same child, the balance of the duplicate account will be treated as a taxable distribution! This is in stark contrast to the other types of accounts listed above, as you can have multiples of each of those account types.
Could Trump Accounts democratize the ever-growing wealth divide? Most likely not, but I believe it’s a fantastic first step that will expose children to the crucial benefits of compounding growth at a young age. We at MORWM recommend using these Trump Accounts in collaboration with other types of accounts, depending on your goals. Trump Accounts are designed to complement your financial plan, not to be a “one size fits all” solution. So, would you say no to a free $1,000? Are Trump Accounts worth it? More than 6 million American children believe they are.
If you are interested, there’s a 3-step process to follow. Complete tax form 4547 (get the reference?), download the app, and create the account. Then celebrate with a newly minted $1,000 for your child.
As always, reach out if you have any questions!
Devin & the MORWM Family