Episode 527 – Trump Accounts

John Walker:
Hey, welcome to the Your Life Your Wealth podcast. I’m John Walker, Regional Vice President at Mercer Advisors. Always a pleasure to be with you. And today we’re going to talk about something, I think it’s been in the news quite a bit, and we’ve certainly got a lot of questions about, and certainly as we come to this time of the year, we get a lot of questions around helping families prepare for college and funding the appropriate types of plans and how it all fits in those plans.

And today we’re specifically going to talk about the new Trump Accounts, right, and the tax advantaged accounts that were created under the One Big Beautiful Bill Act for children under 18. Talk a little bit about how they work, how they’re different from some of the other plans that are out there. And really how they could be a useful tool as a part of a broader financial plan around preparing children for the next steps in their lives. So to help me have that conversation, thrilled to welcome in my good friend and colleague, market leader and CERTIFIED FINANCIAL PLANNER®, Mr. Jason O’Meara. Jay, great as always to have you.

Jason O’Meara:
Of course.

John Walker:
And I’m actually, we’re going to bring in the big guns here. Thrilled to also join us this day is one of our senior directors in the financial planning group, Mr. Bryan Strike. Brian, you have too many letters and numbers after your name for me to rattle them all off, but glad as always to have you join us, my friend.

Bryan Strike:
Yeah, happy to be here. And, you know, guys, I think, you know, we’ve certainly gotten a lot of questions from families that we’re working with on how these new accounts work, what, how they’re different. And so maybe we just start at the beginning, you know, talk a little bit about the context of where they came from, and really what they’re designed to do.

John Walker:
So, so maybe let’s just start very, very simple. Brian, you know, we get a lot of questions simply, you know, what is a Trump Account, right? There’s just, it’s in the news, obviously, and not everybody really understands what they are or how they work.

Bryan Strike:
Yeah, I definitely, I’ve written several articles on Trump Accounts when they first were announced in the One Big Beautiful Bill Act, and ultimately they didn’t become active. In other words, you couldn’t like set one up until July 4th of this year.

So it’s definitely become a much more interesting topic for many people now that we can actually create the account, fund the account. What is a Trump Account and what do I do with it? Ultimately they’re very, very similar to an IRA, an individual retirement account, that you would invest in and have had the ability to invest in for decades. But there are a couple of really big differences between an IRA as we know it and the new Trump Account, and one of the big things is eligibility.

So who is eligible to have a Trump Account and the biggest misnomer in the Trump Account world is, oh, my kid has to be born between 2025 and 2028. If they’re not born in those years, they can’t have a Trump Account, and that’s just not right. As long as the child is under the age of 18, and in fact it’s a little more nuanced than that, you actually have to be under the year that you turn 18. So if you turn 18, say in September, you don’t actually get to open one in that year that you turn 18, it actually is 12/31 of the prior year that’s the cutoff. So you have to be under 18, essentially, in order to have an account.

Now, the 2025 to 2028 birth years, that’s for an added $1,000 pilot program that was set up. And obviously if your child was born between 2025 and 2028, there’s really no reason not to set up a Trump Account and at least claim that $1,000. You do not get it automatically, so it is something that you have to set up the account and you have to make the election for that $1,000 and it’s a no brainer.

There’s really nothing to lose in setting up the account and claiming your $1,000 for your child, but that is kind of aside from who can set it up. For example, in my case, my daughter turned 15 earlier this year, and even though we’re only gonna get a couple of years’ worth of benefit from it, I went ahead and set up an account for her and she’ll be able to continue with that account for the next couple of years.

Jason O’Meara:
So Brian, one thing I noticed and one thing I’ve always been kind of jealous of is people who own their own small business or business tend to put their kids on their payroll and start funding retirement accounts from an early age. Whether it be pictures of the kids on their website, they use them as basically modeling fees. I’m throwing air quotes up because I’ve realized, you know, no one can see me.

But so this would actually kind of fill that void for everybody else, you’re not a business owner, right? You can open up this Trump Account, contribute $5,000 a year for your kid, which is going to be tax deferred, which basically turns into an IRA. So this is a nice little retirement head start. Where I get my question, the question I get the most is, what’s the difference between a Trump Account and a 529, and when should you use either?

Bryan Strike:
No, that’s a great question, and I won’t even open up the bag of worms of modeling fees for your kids and the potential red flags there. So just be careful in doing those things. But, yeah, ultimately, I think the confusion comes around in that you can contribute to the Trump Account early in the child’s life.

As I mentioned, it’s run very similar to an IRA, even though it is separate. Most of the rules kind of correspond. With the 529 plan, that is specifically for education savings. Now, you can use the funds for pre-college expenses. So, you know, if your kid’s going to a private high school or even a public high school and you need to buy supplies or materials or even say a laptop computer or something like that for your child, you can tap into the 529 for that. But ultimately the real purpose is for college education savings for the 529 plan.

Trump Accounts, on the other hand, should not be lumped in as a college education savings vehicle, in my opinion, it’s really more of a retirement plan and allowing your kid to get a jumpstart on saving for retirement. I ran a few numbers just to illustrate, and of course, no guarantees of performance and all that good stuff, but if all you did was claim the pilot program $1,000, let’s say your child was born this year, 2026, and you got the $1,000, you did nothing except invest it in one of the very limited funds that you can invest it in, and we can talk about what the limitations are there if you’d like. But if you earn say 8%, your kid has 65 years probably before they reach retirement for that $1,000 to compound and grow over time. By the time they reach 65, the math would work out to about $150,000 in the account, and you put nothing into it. That’s just the government contribution of $1,000.

On the flip side, if you do have the wherewithal to contribute the max, now the $5,000 per year was mentioned, that is the contribution limit. If you put that $5,000 in for all 18 years that you’re eligible to do so, forgetting the inflation adjustment, right, just sticking with it $5,000 and again it grew at that same 8%, your child would have about $7.5 million when they retire, and that’s off of about a $90,000 total contribution. So the idea of the Trump Account is setting up that compounding to work. You, me, all the financial professionals that I know, kind of parrot the same phrase, and that is time in the market, not timing the market, right? So that the amount of time you have in the market with the money set aside, invested, growing, don’t touch it, leave it for 65 years. Just let the market do its thing and your kid’s going to have a fully funded retirement without having to save anything on their own behalf. That’s amazing, amazing.

Jason O’Meara:
As you mentioned, limited investment options. So while the account is in the quote unquote Trump Account stage, right, where it’s the Trump Account, because once you turn 18, it converts to a traditional IRA, during the time of being in the Trump Account, talk to us a little bit about what are the investment options. You said limited. I’m pretty sure they’re U.S. only.

Bryan Strike:
Yes, that’s correct. So the legal language in the One Big Beautiful Bill Act specifically states that it has to be U.S., primarily U.S. companies. It has to be a mutual fund or exchange traded fund that tracks an index of U.S. companies. So the most prominent one, and I’ll just say, for my own sake, my daughter’s account, it’s invested in the S&P 500 index ETF. I don’t remember the exact ticker, but there’s only a list of about 5 or 7 ETFs and mutual funds that you can choose from. Those also have to have an expense ratio of less than 0.1%, so it effectively needs to be a very, very inexpensive index fund that tracks U.S. companies. It cannot use leverage, you know, the idea is not that you’re doing a whole bunch of trading or anything. It’s almost handcuffing you into kind of just being a good investor and setting it and forgetting it.

Now, there’s a lot of the companies, Vanguard and I think Fidelity as well, has petitioned with the government to say, look, just investing primarily in U.S. companies really doesn’t provide the amount of diversification we think is prudent from an overall investment perspective and so they’re trying to see if we can expand the list and provide some international as well, but one of the things that we’ve seen in the 401k realm is the more options that you provide people, the more kind of paralysis by analysis that ends up entering the game. And so, you know, while I do agree that having some foreign exposure in there would be terrific, the issue kind of comes down to do we want to just keep it simple, or do we want to make it more complex and then ultimately have people who maybe don’t make the best decisions because there’s too many decisions to make. So I can see both sides of that argument, but yeah, that’s kind of the investment selection that we have right now. It’s just a handful of funds that can be chosen from.

John Walker:
Well, we’ll certainly keep an eye on that. I think, you know, there’s probably a compromise or solution potentially available, some sort of globally diversified index fund, etc. There’s lots of different ways to give people international exposure if that’s the appropriate thing to do, but I certainly recognize that we all see the families we meet with their own retirement plans, etc. and who get paralyzed by the analysis of which is the right way to approach this, and sometimes, certainly, Brian, too many options can make it more difficult, right? So keeping it simple has some value as well.

I want to underscore something, Brian, that I think is really, really relevant to spend a little time on, right, which is, I think in much of the way people are perceiving this, or it’s certainly been portrayed maybe in the media, I think people are equating this type of account structure with part of an educational planning type. There is, is it a new 529? Is it a new Coverdell? There’s been lots of different ways to help your children fund or prepare for funding higher education. But to be very clear, this is not what this is designed to do, right? This is, it has a different purpose and it’s something that I think we need to, it might be helpful to spend a little more time on it. It’s something that if you have the resources to fund, you can help set your children up for their retirements.

Bryan Strike:
Yes, yeah, absolutely. So to kind of illustrate more upon that fact, if we just look at the tax benefits around 529 plans in comparison to Trump Accounts, I think it’ll become more clear that the 529 is the far superior plan if your goal is funding your child’s education. So with the 529 plan, when you put money in, it is not tax deductible from a federal perspective. Now, a lot of states provide a state tax deduction, assuming you’re using the state’s plan in which you are domiciled. So if you live in, for example, I live in Georgia. If I use a Georgia plan, I get a tax deduction. There are usually limits of a certain amount based on the contributions I make to the 529, but that’s fairly negligible.

So we put the money in, we don’t get a deduction, but the money grows tax deferred, so there is no tax on the growth over time. And then if we pull the money out for qualified education purposes, then we get it out tax free, and so all that growth that was tax deferred ultimately becomes tax-free growth when we pull it out for a qualified purpose.

Trump Accounts, on the other hand, when we put the money in, it is not tax deductible. So same as the 529 plan. So we put the money in, there’s no deduction on the front end. The amount will grow tax deferred, and there is no state benefit at this point. So no states have said that they’re going to provide a deduction even though the federal government does not. In fact, a lot of states have taken the opposite approach, and they’re making the Trump Accounts more punitive, not less punitive, depending on where you live. California, for example, is a primary example where the growth that’s tax deferred from a federal perspective, the state of California is going to tax that growth as it happens. So definitely pay attention to what your state laws are.

The money grows tax deferred similar to a 529. Where the difference comes is if you pull the money out of the Trump Account for a qualified higher education purpose, there’s no penalty on that, no 10% penalty like we would see from an early IRA distribution or something like that because you pulled it out for education. So that’s an exemption to the penalty. But there will be tax on the distribution related to those tax deferred earnings. So the 529 plan, if I can get the growth out tax free for education, that beats hands down, that beats the Trump Account where you pull the money out and pay tax on the growth.

So again, even though you can save in both during your child’s formative years, you certainly would want to err on the 529 side if you’re saving for education purposes, save in the Trump Account if you’ve got kind of some money to spare in order to contribute to their retirement. Again, try to set it up and then just fund it when you can and then forget about it. Let that thing just grow and compound over time and your kid will be miles ahead of their peers come retirement time.

Jason O’Meara:
That’s perfect. That’s what we’re all looking for, right? Our kids to be better than other people’s kids, and I’m just kidding.

Bryan Strike:
I don’t know about you, but my kid is pretty exceptional, I have to say.

Jason O’Meara:
Yes, mine’s awesome. My two are amazing. So let’s go into something more practical then. So we’ve talked about the why and whatnot. Let’s focus in on a little bit on the how since we’re coming up on time here. How do people go about opening a Trump Account? What’s the process?

Bryan Strike:

Yeah, so there’s a couple of ways that you can do it. You can file the Form 4547 with your tax return in order to open one, and I did that with my tax return, electing to open the account for my daughter. Honestly, the better and easier way to do it, if I had, yeah, I don’t know, you gotta play around with it and learn sometimes. So I learned the hard way. The best way to do it is if you go to trumpaccounts.gov. You can basically file that form electronically. You can also download the Trump Accounts app on your cell phone, which I’ve done as well. And when you go into that, it basically takes you through the process of setting up the 4547.

So, and it’s not, I know that sounds very technical, but they set it up very easy. It’s like, what’s your kid’s name? What’s their Social Security number? What’s, you know, your address? So it’s very, very simple to set it up on the app or through trumpaccounts.gov website. You just fill out a couple of text boxes in there and submit, and they’ll send you a notification that the account is set up and you’re ready to fund.

Again, I did mine through the app, and so you just link it to your bank account, and then you can contribute directly from your bank account into the Trump Account for your child. Again, we’ve mentioned this a little bit, and I’m not sure how familiar people are, but the annual contribution is $5,000 and that will grow with inflation over time. So, you know, the $5,000 will become, you know, whatever if it’s 3% inflation, we’ll get $5,150 or something next year. But ultimately it’s roughly $5,000 there.

Your employer can contribute on your behalf if they set up a plan, and there’s a lot of large companies that have actually already decided that they’re going to set these up. Now, their limitation is $2,500 per employee. Not per employee’s child, so be careful with that. So if I have two kids and my employer contributes the max of $2,500, that’s $1,250 per kid. That does eat into my $5,000 per kid limit, so what’s that, $3,750, I believe, I could contribute to each of my kids’ accounts beyond what my employer contributed. So ultimately, those contributions would be done through the app or through the website, very, very simple to do honestly, and you know, set it up like you would your IRAs. You could contribute the $5,000 all at once. You can set it up to contribute on a monthly basis or something along those lines, whatever is easiest for you, and yeah, it’s actually a very simple process.

They rolled it out pretty quickly and seamlessly. The $1,000 pilot contribution, that amount does not eat into your $5,000 contribution limit for the year. So if you do get that, it’s a one-time $1,000. You don’t get $1,000 per year, but ultimately that $1,000 comes in. You can still do $5,000 on top of that. There are also several folks who have made large, very large contribution donations, such as Michael and Susan Dell, they contributed, I forget how many billions of dollars, but ultimately the idea there is that $250 would go into each eligible child’s plan. Now that is limited based on your geography and living in a quote unquote low income area. But ultimately you have to have a Trump Account open in order to receive the $250. There was another contribution recently, I don’t remember her name, but it was of SpaceX stock. So I think it was like the CFO or something had contributed a huge block of SpaceX stock in order to fund some Trump Account money for, again, low income areas, children. So definitely some big benefits there.

The other thing I would mention is during that eighteen-year period, you can’t get the money out. So this is, it’s kind of locked up. There’s really no easy way to access those funds. So if you put the money into the Trump Account and you think, man, I might need this while my kid’s in high school or whatever before they’re 18, don’t do it, right? You’re locking that money up for those years until the child reaches the year that they’re going to be 18. At that point, the money becomes effectively like an IRA. It’s still in a Trump Account. My recommendation there is you roll the money out of the Trump Account and into an IRA just to simplify the process, and now the kid can contribute to that IRA that was funded by the Trump Account on an ongoing basis as they have earnings themselves. The kid does not have to have earnings to have contributions into the Trump Account, so that’s one of the big benefits of the Trump Account versus just a regular IRA.

Lastly, I would just say that then converting the money into a Roth IRA and making the money tax-free for the, you know, 50 plus years that the kid can sit on those funds is a very, very strong incentive. So I would definitely look into doing that, but just be careful of the kiddie tax and any other potential problems from a tax perspective there, just like every Roth conversion.

Jason O’Meara:
Right, you want to make sure you’re running projections, tax projections in that year, make sure that we’re not causing any adverse tax effects in that year. But yeah, no, that’s perfectly smart. I mean, at the end of the day, you know, what’s better than $7.5 million in a traditional IRA, $7.5 million in a Roth IRA.

John Walker:
Absolutely. Sounds like a great opportunity for families with young children to take advantage of, right? And really important that you understand the distinctions, how to functionally open one up, and really the purpose that they can play in helping prepare your child for future retirement.

As always, you know, talk to the team that you’re working with, talk to the team that’s helping build out your financial plan, make sure that this fits within the broader context of what you’re looking to accomplish, evaluate your options when it comes to this and 529 plans and all the other different vehicles that are available to help save for your child for whatever purpose you have. Bryan Strike, thanks so much for joining Jason and I today to really help clarify and add some context as to how these Trump Accounts really work and the purpose they serve.

Bryan Strike:
Very welcome.

John Walker:
So, if you have questions about how these work, or if you just want to talk more about financial planning and how this all can fit within what you’re trying to accomplish, we’re always here to help. You can email us anytime at jwalker@merceradvisors.com or jomeara@merceradvisors.com. We love to hear from you and we’re always here to help. On behalf of Jason O’Meara, I’m John Walker, Regional Vice President of Mercer Advisors. Thanks so much for listening to Your Life Your Wealth podcast. See you next time.

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