Smart Savings for the Next Generation: Understanding 529 Plans and Trump Accounts

Hello, everyone. We’re gonna give everyone a few minutes to get logged in. So just hang with us for a few minutes.

Again, if you’re just joining us, we’re giving it a few minutes for everyone to get into the webinar.

Welcome, everyone. We are giving it just another minute as everyone logs in to the webinar, and we’ll get started.

Okay. Welcome everybody to today’s presentation, Smart Savings for the Next Generation: Understanding both 529 plans and Trump Accounts. My name is Bryan Strike, Sr. Director of Financial Planning here at Mercer. And with me today, we have, Director Michael Van Boening, and he is gonna be speaking to us about 529 accounts. Before we get started, I wanted to just talk briefly about this presentation and why we’ve kinda combined these two items.

Some people may be a little bit miffed by the name Trump Account. This is a brand new account created by the One Big Beautiful Bill Act that was passed last year, and these accounts will be opening up for contributions in July this year. So still not open for investment just yet, but they will be coming very soon.

And so we’ll be talking about them, how they differ from 529 plans because there’s a lot of confusion around whether people should use 529 plans or Trump Accounts. Our opinion is that you might wanna consider using both. But we’ll get into the pros and the cons on each of these different investment vehicles and how best to utilize them for your financial future and for your family’s financial future. So, without further ado, there’s a lot of information to go over, so I’m going to turn it over to Michael to get started with 529 plans.

Thanks so much, Bryan. So, as Bryan said, we do have a lot of information to share here, so I want to be diligent about going through the information that we have. Bryan and I are going have a dialogue based on the questions that have been submitted and are submitted at the end of pretty much each slide. So I wanted to discuss, first of all, that two thirds of families are leaving one of the best college funding tools on the table. Only about one third of families actually use 529 plans. So what are these? They’re named after section 529 of the Internal Revenue Code.

So they are a federal law, but yet they’re administered by the states. So the individual states administer 529 plans.

Forty nine states have a 529 plan. The state of Wyoming is the only one that does not.

529 plans are flexible. They’re convenient. They’re simple to establish and maintain. And you’ll see that as we go through that, there’s a lot of flexibility within the 529 plan that you don’t see in other investment vehicles.

There are considerable federal and state tax considerations. When you’re investing in a 529, we’ve got tax deferred and potentially tax free growth, both from a federal and a state standpoint.

And then professionally managed investments, extremely important. So some of the investments that we use in our retirement accounts are the same investments that can be found in a 529, low cost, diversified investments. We could have all the way from a plain stock fund, bond fund, stable value fund, and then what we call enrollment based or age based funds that have a glide path that get more conservative as the student gets closer to college. So I call that the easy button of 529 plans. And then estate planning and gift tax advantages. There are several, advantages from an estate planning standpoint, and we’ll talk about that in just a few minutes.

I also wanted to add that over ninety eight percent of colleges and universities are eligible to use 529 funds as well as vocational schools, trade schools, and apprenticeship programs.

Would you believe that there’s over four hundred institutions outside of the United States that will accept 529 funds? So pretty much any major country, major city, you’re gonna find a university, they likely are on the list, and yes, there is a list of institutions that take 529 funds as qualified.

So, as I mentioned, the 529 plans have many key benefits. Flexibility being, the primary. There are no age limits, no income restrictions, and no time constraints. So it doesn’t matter how old you are. You could open a 529 plan.

You could be eighty years old, open a 529 plan. You can open a 529 plan before the child is born. Just simply name yourself as the owner and the beneficiary when the child is born, has Social Security number, change the beneficiary to the child. Many clients do that.

No income restrictions.

So we find that a lot of tax advantaged accounts have income restrictions so that we phase those benefits out as your income rises. With 529 plans, we don’t have any of that type of constraint.

And no time constraints, this is important, in that there’s never a period of time where you have to take the money out of the 529. They can grow into perpetuity. That means that that could be used for generational planning for education.

Control. The account owner is responsible for choosing the investment, selecting the beneficiary, and most importantly, determining when and what the distributions are used for.

Now, is important because there’s only one account owner. We never have a 529 plan that’s jointly owned by a husband and wife. The account owner is a single person. That means that husband and wife could each own an individual 529 plan for each child if they wanted to.

Selecting the beneficiary. The beneficiary never has the option of saying what they want that money to be used for. That is a responsibility and a duty of the account owner, period. So that means that the child doesn’t get to say, I want to use the money for this purpose instead of education. They don’t own the account. So I know I’ve emphasized that and I think it’s a very important, point, especially for grandparents that are opening 529 accounts, that they have complete control of the account.

Now I’d also like to mention that in every 529 account, there is the concept of a successor owner. So when the owner if the owner happens to pass away, the account would automatically go to the successor owner to become to step into the owner’s shoes. So I highly recommend that anytime that you open a 529 that a successor owner is named because it will tie up that account, if that money needs to be used and there’s no successor owner named.

And then generous contribution limits. So every state as I mentioned, the states administer 529 plans. Every state can set a contribution maximum amount of contribution. There is no account value maximum for a 529. It could grow as large as it does.

The contribution limit is important, and it is by state. If you happen to be in a state where you’ve saved let’s say I’m in Colorado and you’ve saved over five hundred thousand, you could simply open a separate 529 in a different state, and now you’ve got those contribution limits open again.

So the state it is a state by state contribution maximum.

Hey, Michael. So many people believe the annual contribution limit is only, like, nineteen thousand dollars, but your slide here and your commentary says that it’s much, much higher than that.

Can you explain why this might be a common misconception?

Yeah. Absolutely, Brian. That is very common. So the nineteen thousand dollars refers to the annual contribution limit before you have to file a gift tax return. So the nineteen thousand dollars you can give, any individual can give to any other individual nineteen thousand dollars before they would have to file a form with the IRS saying, Hey, I’m giving a gift larger than my annual exclusion. So the nineteen thousand is just the annual exclusion. The contribution limit happens to be the account limit for contributions overall.

So there are significant tax advantages with 529s. In fact, over thirty states provide a state tax deduction. A few provide a tax credit for contributions into a 529.

There are also states that have no benefit whatsoever, and we’re gonna talk about that a little bit towards the end and maybe some strategies for people who live in those states. But the accounts grow state and federal tax deferred. Now, why don’t I say tax free? Because you could take this money out as a non qualified withdrawal and then you wouldn’t have this state tax deferral, right, because the states can literally come back and claw back, take back any tax benefit that they gave to you if you take it out as nonqualified, and there are penalties associated with it.

So even though that’s a negative, for most people, I will say the average amount that somebody saves in a 529, and this is nationwide, it’s been going on for years, is about thirty thousand dollars. That’s the average amount. If we look at the median, the median is actually much lower for those that know their statistics. The median is closer to, like, thirteen thousand dollars.

So the very large accounts are skewing the average, but nonetheless, we’re talking about thirty thousand dollars. Again, it’s a missed opportunity because we know that college is so much more expensive than that currently.

Withdrawals, including principal and earnings, are both state and federal tax free when used for qualified education expenses. So, really, that is triple tax advantage. If you live in a state where you’re getting a state tax benefit for the money going in, then you’ve got the tax deferred growth and no tax on the way out. There are very few accounts anymore that are triple tax advantaged. So you might be asking, well, what are qualified education expenses for 529? And that really is tuition and fees, room and board, books and supplies, Internet services. Look, you could go out and buy a laptop computer every single year and it’d be a qualified 529 expense.

Now, one of those actually has some stipulations around it, so I’ll cover that briefly. Room and board is just a is an area where there are always a lot of questions. You have to be at least a half time student enrolled in the school to be able to take advantage of that. As well, you can’t spend more on room and board, and this has to do with people who live off campus primarily.

You can’t spend more than what the college lists on their website for room and board. So it’s the component of cost of attendance that the government will look at and say that’s the limit that you can take out of the 529 plan. So if you live in the Taj Mahal in your city for room and board, you may not be able to take a complete qualified withdrawal.

They are very generous, I will say, in the cost of attendance for room and board.

Bryan, did you have an additional question there?

Yeah. Just are there any situations where the withdrawals might be subject to tax or penalties? You you had mentioned that if you take it out and it’s not a qualifying expense, then that would be subject to income tax. Is that the whole amount or just a portion of it or how does that work?

Yeah. Great question. So nonqualified withdrawals are only penalized on the earnings, on the growth of the account. So when you invest in a 529, it is always, always after tax money that’s invested.

And so, therefore, it’s only the growth that would have a penalty. Now, for non qualified withdrawals, it’ll be a ten percent penalty, again, on the growth only, and on that growth, you’re gonna have ordinary income tax. Now, what are the exceptions? Death, disability.

What if you get a scholarship, right? And let’s say the child gets a scholarship for, I don’t know, a hundred thousand dollars, let’s say, and you’ve got a hundred thousand dollars in the 529 account. Well, you could literally remove all of the money from the 529 account without penalty.

Now it is an exception to the nonqualified rule, so you still would have ordinary income tax due on that growth, but you don’t have a penalty. And it’s the same with death and disability. Thank you, government. Even under death and disability, you still would have the ordinary income tax on that road.

There are gift limits, as I mentioned at the beginning. Nineteen thousand dollars, any individual can gift to another individual. A total of nineteen thousand dollars. That number is unchanged from twenty twenty five. Again, that’s an annual number. It does index year over year.

There’s also five year forward gifting. This is a very, very powerful tool that’s an exception that’s allowed for 529s in that we can bunch contributions.

So instead of contributing each year for five years, we could bunch all five years at one time for a maximum of ninety five thousand dollars for an individual, a hundred and ninety thousand for married couples, and make that gift into the 529. Now, why we say it’s an estate planning tool? Because once the gift is made, it’s considered out of the estate.

So imagine you have multiple grandchildren and you make the gift of a hundred and ninety thousand. A couple makes the gift for a hundred and ninety thousand. Multiple grandchildren. That’s a considerable amount of money that is outside of their estate if they’re trying to minimize estate tax liability.

Now, couple of points around that. Even though you use five year forward gifting, you still have to file, because we’re over the nineteen thousand, You have to file a gift tax return each and every year. That is one of the stipulations.

And, Michael, we’re getting a couple of questions that are repeats here from from multiple people. So which state should I open a 529 plan in? Should it be the state that I live in? Should it be the state my kid lives in? Should it be a completely different state? And how do I know which, which plan or which state plan would be the best for my situation?

You know, this question comes up a lot. And because, again, each of the states has a 529 plan except Wyoming, You could choose pretty much any state that you want, but what the recommendation is, if you live in a state that offers a state tax benefit, a tax deduction or a credit, choose that state’s plan first. That would be my primary plan to use. And the reason is is that the state tax benefit is going to outweigh, let’s say, perhaps a slightly larger expense ratio or, a slightly lessened performance, the state tax benefit is going to outweigh that. So, that’s for the majority of states. We also have what are called tax parity states, which I’ll cover in just a few minutes. Those states offer a tax benefit no matter what state’s plan you invest in.

So there are nine states that offer a benefit no matter which 529 plan you’re in. And then there’s a host of states, I think I wanna say about a dozen, that don’t offer any tax benefit, any credit. In that case, I would say invest in, let’s say, the Utah plan, for example. I really like the Utah plan.

It’s got very, it’s it’s very simple. It’s easy to use. They’ve got great investments, a great lineup for investment managers. And so those would be my decision points depending on which state somebody lives in.

If you have questions about that, of course, we’d be happy to help you one off with that decision making process.

Yeah, state benefits and all that stuff is, you know, really plays a part in that as well as the investment lineup and so forth. But to move on, another common question we get from clients all the time is, hey. I put all this money into the 529 plan. I saved up.

The kid got a scholarship. They didn’t go to college. They whatever. Or they went to college and it was cheaper than we thought.

We have excess money in the 529 plan. What do we do with that money?

Do we just keep it in there? Do we take it out? What’s what’s our options?

So, really, let me lay out those options, Bryan, and that’s a great segue into the 529 to Roth rollover. But let me cover the easy ones first. The first one is that you can change the beneficiary very, very easily, as well as you can change the owner on account. You can change the beneficiary.

So if you’ve got leftover money for one child, or let’s say they didn’t even go to college, you can just move it to another child. It’s a it’s a simple form that you submit. They’ll make the beneficiary change. You can make as many beneficiary changes as you want.

You could leave the money for their grandchild. So for the beneficiary that you have, they didn’t go to college. Perhaps your grandchild would be going to college, right, or great grandchildren. Again, no time limits, very flexible.

You could pay down student loan debt.

So if that beneficiary that you have named, let’s say they went to college, there’s additional money in the 529, but they’ve incurred some loan debt as well. You could pay up to ten thousand dollars. Again, depending on state tax rules, you could pay ten thousand dollars out of the 529 as qualified. That is a federal rule, and you could do it federally.

Make the payment. You can also do the exact same thing with another ten thousand dollars for any sibling.

One other item that you could do with this, k through twelve expenses are also another opportunity to take money out of a 529. This was not always allowed. This is where the old Coverdell or education savings accounts were. We’re not even gonna address those, but they used to handle k through twelve. Now 529s can be used to fund K through twelve expenses. So let’s say you have a your child does not go to school, you could then perhaps fund the the grandkids’ K through twelve education to private school out of a 529.

The next one that I would get to is the 529 to Roth rollover. The reason that I’m showing a slide is because there are so many rules about eligibility. The main one being is that there’s a lifetime limit on the amount that you can roll from a 529 to a Roth account of thirty five thousand dollars.

The account has to have been in place for at least fifteen years with that beneficiary’s name in there.

If you change the beneficiary at some point, it’s a gray area. We don’t have any guidance yet from the government on whether that’s going to reset that fifteen year clock. So just be aware of that, that it is not stated. We’re trying to advise people and be conservative in our advice there.

The rollover amounts that you can actually move from a 529 to a Roth per year are limited to contribution limit of seventy five hundred dollars per year. So, therefore, we we wanna be respectful of that number. If you make a contribution into your Roth account, that counts against your rollover ability as well.

Earnings wise, you have the beneficiary has to have earnings at least in the amount of the rollover, and then AGI limits do not apply. Again, very, very flexible.

This could be a great planning tool for you if you have additional monies. I used to advise people don’t, don’t save more than seventy five to eighty percent in a 529 account. Try to fund the balance from cash flow, from scholarships, grants, etcetera. But now with this thirty five thousand dollar 529 to Roth rollover, this gives us a bit more flexibility to perhaps even overfund intentionally on a 529 because what a great start for a child to have a thirty five thousand dollar account right when they get out of college.

There has been some recent legislative activity. Last year, we adjusted the k through twelve withdrawal, cap from ten thousand up to twenty thousand dollars. I think that’s probably really the most impactful from a legislative standpoint. But the 529s are being expanded. So standardized test fees, let’s say for SAT, ACT, AP classes, all of that is now qualified for use out of a 529.

Transfers from a 529 to an ABLE account are now permanently allowed.

They ex the government expanded artificial intelligence focused training for 529, so both from a k through twelve standpoint as well as higher education.

And then lastly, I wanted to cover the state tax map. Again, I mentioned this before, but I wanted to show the states that are in the raspberry color there are the tax parity states. There’s nine of those states. Again, those states do not have, any stipulation that you have to be in that state to use, to to take the state’s tax benefit.

So they have tax parity with all of their states. The states that are in the the light, I guess, the the pale blue are those with state tax consideration, so either a tax deduction or a tax credit.

And then the tax neutral states are the ones that don’t have an income tax in their state, so, of course, they’re not gonna give you a state tax benefit there. But we also include states like California that do have state income tax, but they don’t provide any benefits. So it’s best to check which state you’re in. If you have questions, please let us know. We’re more than happy to go into the weeds with you on the different state tax rules because there are a lot of variations in that.

Bryan, any other questions?

A lot of questions coming up in the Q and A, but for the sake of time, I’ll let you respond to those, via via chat there, and we’ll move on into the next section.

Excellent.

Okay. So, again, my name is Bryan Strike, and we’re gonna be talking about the Trump Accounts.

These are a newly created code section section five thirty cap a, so it’s a little harder. It doesn’t roll off the tongue quite as well as 529 accounts, but it’s it is under code five thirty cap a. So the five the Trump Accounts were created last year under the one big beautiful bill act, and the the legislation specifically said that they cannot be funded within twelve months of the enactment of the legislation, which puts us right at July fourth, July fifth of this year. So we can kinda go ahead and start setting them up, but we can’t actually fund them just yet. But the big question is, should I even fund one at all? What are these, and, what’s the best use case for them? Now a lot of people may, again, have some angst about the naming of these accounts being, that they are Trump Accounts, but think about them just as a form of IRA, and they are going to be utilized for for saving, specifically for your child’s or grandchild’s future.

And, really, the difference between the 529 plan, which is specifically set up for college education savings, it has been expanded over the twenty plus years that they’ve been around to also include k through twelve expenses. Trump Accounts, really the best use case that we see for them is for helping your kid kind of prefund their retirement savings.

So should I use a 529 plan or a Trump Account? 529 account, still probably the best account to utilize for college education savings purposes as well as other, you know, k through twelve expenses to the limit, is now pretty high at twenty thousand per year. Trump Accounts, on the other hand, really, if you’ve got extra money to set aside to really help your child or grandchild fund their future retirement. This is where the Trump Accounts would really come into play.

The more I thought about this as I was reading through the legislation, it reminded me of the early two thousands when George w Bush was talking about, you know, privatizing Social Security. Obviously, there’s nothing in here about privatizing Social Security, but it does help fund fund retirement really early in a child’s life and allowing the investment in compound growth to occur. So let’s get into the the weeds a little bit. There’s the growth period for the Trump Account.

And now, obviously, the account can grow forever. Right? You can have it invested. You can let it grow with those investments.

But there’s a specific period of time between birth and the year prior to the year the kid turns eighteen that the legislation specifically calls the growth period. This is the period of time where the Trump Account acts a little bit differently from an IRA. There’s gonna be contributions allowed regardless of whether that kid has earned income or not.

There’s going to be specific investment selections that are allowed. There’s a lot of investments that are not allowed, at least not right now. And then there’s also a very, very strict withdrawal limitation. Pretty much you can’t take the money out. So you put the money in and you can’t take the money out until the year that the child reaches age eighteen.

So I’ll go into each of these different categories in the next couple of slides here. So contributions. Probably the biggest one that most people have heard of when the legislation was first announced is this pilot program.

The pilot program allows for the US government to fund one thousand dollars into the Trump Account of any child born between twenty twenty five and twenty twenty eight.

That thousand dollars is kind of a is seed capital, if you will. If you just let that grow from the kid being born till, let’s say, they’re sixty five, growing at eight ish percent, they would have about a hundred and fifty thousand dollars in that account when they reached retirement age, assuming retirement age continues to be sixty five later on down the line. If we compare that to the median retirement balance today of someone who’s sixty five, that would be about ninety thousand dollars. So you can see just a thousand dollars funded right off the bat when the kid’s born can grow to a very substantial sum of money.

The

pilot contribution, although it’s only for children who are born between twenty five and twenty eight, any child under the age of eighteen, you can set up a Trump Account for.

So my daughter was born in twenty eleven, and, so that puts her at fifteen years of age. So I’m setting up a Trump Account for her, and I’m gonna fund it for three years until, she’s no longer eligible for, these Trump Account contributions.

Qualified contributions is next. This is for states, Indian tribal governments, and five zero one c threes. If you really just think about this one, most of you have probably heard if you followed at all on the Trump Accounts is the Michael and Susan Dell contributing six point two five billion dollars to fund Trump Accounts for some twenty five million children.

It’s specifically targeted to lower income areas of the country, and that’s gonna allow for two hundred and fifty dollars to go into each of those twenty five million kids’ accounts. So any other big, you know, contributions that get made like that from a five zero one c three perspective five zero one c three, I should say, is just charities. So you basically fund it through the charity into the 529 or, excuse me, into the Trump Accounts.

Employer contributions, this is gonna be more, you know, prevalent, I think, than I initially thought it would be.

But there’s a a fairly large list of big companies that are gonna be offering employer contributions of up to twenty five hundred dollars per employee.

So these contributions would be made, I’ve wrote an article that’s on our website, through Trump Account contribution plans. It has to be a formal written plan and all that. But, ultimately, the great news there is your employer can obviously help to fund those Trump Accounts for your kids.

And then the most common is where mom, dad, grandma, grandpa, aunts, uncles, whoever can fund these are the standard or general contributions. They can fund up to five thousand dollars per beneficiary per year. Now that five thousand dollars is reduced by any amount that the employer contributes on that beneficiary’s behalf, but it does not is not reduced by the thousand dollar pilot program or any five zero one c three contributions that are also made. I know that’s a lot, and I went kind quickly.

Really, the idea there is for most people, you got five thousand dollars you can contribute.

I believe in twenty twenty seven, we’ll or after twenty twenty seven, that five thousand dollars will start being indexed for inflation. So it’ll start increasing slowly over time, similar to, you know, IRA contributions.

The next bit, is is timing and irrevocability.

These Trump Account contributions, as I mentioned before, one of the big drawbacks to the Trump Account is you cannot access that money prior to the year in which the child reaches age eighteen. Now it’s important that I emphasize that. It’s not when they turn eighteen, it’s the year prior to the year they turn eighteen. So if your child turns eighteen in July of twenty twenty six, then their growth period ends in twenty twenty five, and that would be the last year to make any contributions. But now being twenty twenty six, the year that they turn eighteen, now the account can be accessed for distributions.

Okay?

Brian Yeah. Brian, we had a question of whether the five thousand dollars, is the maximum limit in even including the thousand dollars. So I could you just clarify again that If they’re eligible for the government’s one thousand dollars, does that count towards the five for those three years, or is it, like, outside of that?

It is outside of that. So if my child was born, let’s say, in twenty twenty five, once we get the account set up and ready to go, you do have to make the election for the thousand dollars, so it’s not automatic. But you can make that election when you file the forty five forty seven form, or you can sign up for the account on, Trump Accounts dot gov. And, in both of those situations, you can elect for that thousand dollars, but that’s in addition. So you get the thousand plus you can put five thousand in. The only time the five thousand dollars is reduced is if your employer contributes on your child’s behalf. So if my employer put in twenty five hundred into my kid’s account, I can only put twenty five hundred in as well.

Excellent. Yep.

On to the investment side, this is an area where there has been some pushback from several of the larger brokerage firms saying, you know, just being able to invest in US companies doesn’t provide a well diversified investment allocation. So, you know, we’ll see if this changes over time. But right now, the only permitted investments are mutual funds or exchange traded funds that track an index of primarily US companies. It does not use leverage.

And very importantly, the expense ratio needs to be less than ten basis points, which is point one percent. In other words, very inexpensive US based investments. Fortunately, there’s a lot of those index type products that are available for a very low fee. And, really, the idea here is, you know, you can make these investments and they can be changed over time, but, again, they have to be US focused companies.

You can’t use derivatives, leverage products, margin accounts, private placements, all that stuff. So very, very similar to IRAs for most of that. Now IRAs, there, you can use some derivative products, but generally speaking, not typically the greatest idea, but it can be done. With a Trump Account, that’s not the case. So the idea here is, you know, encourage long term investments, focus on long term returns, and discourage active trading since, you know, you’re only limited to to certain investments within these accounts.

K. Next slide.

Okay.

Withdrawal limitations. A lot of people have the mistaken thought that hardship withdrawals are allowed here, and they are not. So the only withdrawals that are allowed from Trump Accounts during the growth period, so from birth until the year prior to the year the kid turns eighteen, there really is no way to get the money out unless you do a qualified rollover, which is really just moving Trump account money from one Trump account to another.

Able account rollovers, so this would be moving the money from a Trump Account to a 529 Able account.

That would be in the event that the child is disabled.

This is only allowed in the year that the beneficiary turns seventeen, so it doesn’t give us a whole lot of flexibility.

And then if we made any excess contributions. So let’s say we put in five thousand, not realizing that our employer put in two hundred and fifty bucks, then we’ve made two hundred and fifty dollars too much in contributions.

We need to pull that two hundred and fifty dollars out by April fifteenth of the following year or we’ll be subject to a six percent excise tax for failure to to withdraw that. So there are I mean, there really are no ways to get your distributions out of or your contributions out of these accounts until the year the child reaches age eighteen. Now once they reach age eighteen, the world really opens up for these accounts. They can start taking the money out for really any reason that they want to.

The downside is once you reach age eighteen, the Trump Account rules kind of end, and you’re gonna start being subject to the rules that are very common with IRAs. So you’ll still own the Trump account, and it’ll still be considered a Trump account. It’s just you’re not gonna be able to make the five thousand dollar contributions. You have to have earned income to contribute anymore, and you can take money out.

It’s gonna be subject to tax on any amount that is not basis, and you’re going to, you know, be subject to tax and potentially penalty if the distributions are not are not subject to an exception. So the good news is an exception that will likely be used is education purposes. So pulling money out for higher education purposes could certainly be a benefit for the, the penalty relief. However, you would still pay tax on the earnings portion that you pull out, and, that’s where the 529 really helps out.

It’s a lot more beneficial since that money could come out for education purposes on a tax free basis.

If the beneficiary dies within the growth period, the account is fully liquidated and the tax liability must be paid. It’s either gonna be paid by the beneficiary themselves if they don’t have a a beneficiary of the account, or it will be the whoever the beneficiary is would pay the tax. So if my child is the owner of the Trump Account, I leave the Trump Account or, excuse me, she leaves the Trump Account back to me, for example.

So she passes away in the growth period, the account comes back to me. It’s gotta be fully liquidated at that point. I pay the tax. K?

If she died and she didn’t have a beneficiary listed on the Trump Account, then that income would flow into her final year income tax return. So, once you reach age eighteen or the year you reach age eighteen, like I was mentioning before, the account really starts operating very similar to an IRA. And, honestly, my advice is to just get rid of the Trump account at that point. Now things could change over time if these continue to to gain, steam and more people are utilizing them.

But, really, at this point, I would say when they reach age eighteen, the best advice is to roll the money out of the Trump Account and into an IRA in that child’s name. So the Trump Account’s theirs, so they’re gonna open up an IRA and roll the money into the IRA. Why would I recommend doing so?

Really, it just the Trump Account’s gonna be treated like an IRA anyway. If you get it out of the Trump Account, now you can start dealing with other things, investing it differently. Any of the distributions would be treated the same. Any of exceptions to the ten percent penalty would be treated the same. So it just simplifies their situation, not having a Trump Account and a separate IRA and potentially even a Roth IRA. If we just take it out of the Trump Account, move it into an IRA, and then go from there.

From there, again, I I would recommend strongly considering doing Roth IRA conversions.

The child will usually have very low income from eighteen on until they really start, you know, get a normal full time job and and all that good stuff. So it may be wise in those lower earning years for that child to do a Roth conversion, you know, of of some form or some amount of that money.

Brian, some people have asked about just rolling the whole account based on what you said, just rolling it all to a Roth account when the child reaches eighteen. Should they do that?

They could certainly do that. My recommendation again is to move it into an IRA first and just kinda get rid of the Trump Account at that point. And now we can start doing more targeted small incremental Roth conversions. The reason I recommend that instead of just doing everything in one fell swoop is because of what’s known as kiddie tax.

So when a child is eighteen, if they’re not earning enough money to, you know, in excess of half of their own support, they’re subject to what’s known as the kiddie tax. And so any Roth conversion would be considered unearned income, and the child, assuming they have no other earned income or any other sources of income, only thirteen hundred and fifty dollars, one thousand three fifty, would be tax free. That’s the standard deduction for kiddie tax. The next one thousand three fifty would be subject to the kid’s ten percent income tax bracket.

The remaining amount over twenty seven hundred dollars is subject to tax at the parent’s highest marginal rate.

So while it might look like the kid should pay very little tax on it, because of the kiddie tax rules, it may be that the the child actually pays a very large amount of tax on it. So by doing incremental and very, like, intentional small Roth conversions over time, probably from, you know, eighteen until twenty three, twenty four, twenty five, something like that when the kid actually starts to establish themselves in their own career, you could probably move out most of the money at that point. Now remember, any contribution that the parents put in, grandparents may put in for the kid, all of those contributions are made on an after tax basis, and so there is basis in the account.

So if I’ve put in five thousand and the account’s grown to ten thousand, well, I only have to pay tax on five thousand of it. So maybe I could do a distribution of, you know, fifty four hundred dollars and that would only be taxable income of twenty seven hundred, I would still fall under, you know, the the marginal, you know, the kid’s marginal rate instead of the the parent. So definitely something to to consider, but I highly recommend I mean, the the perfect strategy in this situation for these Trump Accounts, put in five thousand dollars a year from when the kid’s born until the year they turn seventeen or until the year they yeah.

Until the year they turn seventeen, that’d be the last year you can do it. That would account amount to ninety thousand dollars, not including any inflation adjustments. If you grew that money at eight percent, I know that no guarantees or anything like that, but if you grew that money at eight percent for the rest of that kid’s, you know, working career until they’re sixty five, the math works out to about seven and a half million dollars inside, a Roth IRA, assuming you did the conversions along the way. And, you know, that that would I mean, seven and a half million tax free, that is basically fully funding that kid’s retirement, and they would have to save very little on their own, over their working careers.

Obviously, we encourage them to save some on their own, but you get the idea. Like, if we can start early, use that that time to really grow the account value, that’s where the value of these are really gonna come in. It’s just compounding over six decades plus. Like, that’s huge.

That’s really, really huge.

So there are some benefits. Like I mentioned, get the free money.

If your kid was born at twenty twenty five, six, seven, or eight, you know, sign up for a Trump Account, make the election, get the thousand dollars. That’s just a given.

Also, having signed up for the Trump Account, if you’re eligible for that Michael and Susan Dell money of two fifty, that would be allocated to your account. Again, it is gonna be targeted for certain groups and classes of folks.

Tax advantage growth, of course, anything that we can grow in a tax deferred shelter is much more powerful than growing in, say, a custodial account or other brokerage account, and it provides us with a big chunk of money that we can do Roth conversions on while the kid is starting their career and making very little money themselves. Intergenerational, anybody can contribute. Now I will say and be very careful on this, opening the account. If you’re a grandparent, I know you’re probably very well intentioned. You wanna open up one of these accounts for your grandchild or grandchildren.

You you can, but there is an ordering rule. So let the guardian is the first in line that can open one of these accounts for the kid, then the parent, then grandparents or adult siblings and then grandparents or something like that. So talk to your children and have them open the account. You can only have one Trump Account per individual. So so your your grandchild can only have that one Trump Account. It can only be opened really by the by the legal guardian is is the first in line there. So just be careful that you’re not accidentally opening several Trump Accounts because that is not allowed.

And then, obviously, early retirement planning.

On the flip side, disadvantages to Trump Accounts, the contribution limits are a little bit lower. Some people might be more you know, have more money that they like to stick in than the five thousand a year, so you might be limited there. But if that’s the case, max out the Trump and then work on a different type of account even if that’s just a brokerage account. Withdrawal restrictions are another big one.

You can’t even access the money and, like, hey. I just I’ll pay the tax and penalty. I just need to get them you can’t do it. So it is the money is locked up for the first seventeen years of the child’s life. Once they turn eighteen, all restrictions are removed.

However, tax and penalty could still come into play. Limited investment flexibility.

You know, investments were big, diversification fans investing in, certain sectors. You can’t really do that. You’re not you know, let’s say you really wanna target and this is not advice. I’m just hypothetical. If you wanted to invest in, say, technology or consumer discretionary, You can’t really target those specific sectors. It needs to be a pretty broad based index of US companies.

The last two are probably the biggest, kind of straws that break the camel’s back to a certain extent. I think the government will fix the gift tax return requirement issue.

So right now, contribute five thousand dollars into the Trump Account for a kid, since they cannot access that money right away, it’s considered a future interest gift, which means you have to eat up five thousand dollars of your lifetime exclusion, which isn’t a big deal for most people because that amounts fifteen million dollars. But it does mean you have to file a form seven zero nine, which is the gift tax return just to say, hey. I wanna use up five thousand dollars in my exclusion.

Unfortunately, it’s just a, you know, an administrative burden. And if you have someone else prepare taxes for you, that’s a couple hundred dollars for a tax return, which is really a nothing burger in my opinion.

One way around that, and you have to be careful on this, is maybe you gift the money to your child or grandchild, you know, into a brokerage account for them, into a checking account for them. Let the money sit for a few months, and then the kid contributes to their own Trump Account since the money was theirs and they could do anything they wanted to with it while it was in the checking account. It’s a present interest gift, and you wouldn’t be subject to the seven zero nine requirement. The last one, and this is really gonna hit people in certain states, is state conformity.

Sir, right now, the Trump Accounts from a federal perspective, any growth, interest, dividends, cap gains within those accounts as they grow are tax deferred just like they would be with an IRA.

California, Hawaii, Kentucky, Massachusetts, Pennsylvania, South Carolina, and Wisconsin are currently on the list as states that are gonna tax the growth of the accounts each year as it happens.

I’m not exactly sure yet what that’s gonna look like from a reporting perspective. So each year, you’ll get a fifty four ninety eight t a form that’s gonna track basis in the account. It’s gonna track the value of the account and all those good things. That’s all on the, administrator of the account or the custodian of the account. So you don’t have to track any of that other than to keep the fifty four ninety eight TA forms when they come in. However, there’s gotta be an additional maybe ten ninety nine or something for those, particular states that would show how much would be taxed in those situations. There are a couple others, other states.

My home state of Georgia, Maine, Vermont, and Indiana are all considering legislation, but nothing has been currently passed yet. So there is some state issues, where there may be a difference between what happens on the federal perspective and what happens at a state level. So we’re just gonna have to give it some time and see what happens there. But that’s definitely gonna throw a wrinkle in, you know, in this and potentially make these accounts not as beneficial as they could be. I like to call it a return on hassle. So, you know, it’s there is a benefit to these accounts, but how much hassle are you willing to deal with to get to get those benefits?

With that, we’re at twelve fifty six on the East Coast. So that leaves us just a couple of minutes. Was were there any questions you saw, Michael, that came in while I was talking that I should hit on?

Yeah. We we’ve got a we’ve got a couple of questions here. So somebody did ask about the state conformity issues and how they’re gonna impact, like, real world usability of Trump Accounts. What are your thoughts on that?

Yeah. I think I think it’s gonna be a bit of a mess, quite frankly. I’m gonna pick on California because California is the one that’s kind of been the most aggressive against Trump Accounts.

From what I’ve heard so far, they want to any money that goes in from your employer does not create basis in the account for you, but you also don’t have to recognize it as income. It’s kinda like a fringe benefit. Right? So the employer deducts it.

The employee does not have to pick it up in income, and it goes into the account. No no basis since no tax was being paid on it. California is saying no. We don’t like that.

So the employer will get a deduction, but the employee does have to pick it up as income, and it would be taxable income, but only at the state level. So you’re gonna have a federal basis that doesn’t include the employer contributions. You’re gonna have a state basis that does include the employer contributions. Then you’re gonna have differences every year because California is gonna tax the growth within the account.

So you’re gonna have an adjustment to the state basis and not the federal basis.

So that just becomes a complete can of worms that, quite frankly, I’m not sure how to reconcile at this point. Again, we don’t even have, you know, any sort of structure around what documents would be provided to illustrate to the end taxpayer what the income being earned looks like and so forth. The other question then is, what if you live in California while you were funding it and then you move to another state that didn’t have you taxed on those earnings, do you somehow get a state benefit at the new state even though that state didn’t collect the taxes that, you know, California did. I I

don’t know the answer to that. So that’s definitely going to be a big hurdle to get around, and, we’ll have to wait to see how the states address it. Again, most states are conforming with federal law on these accounts. But if you do live in one of the other states, it may be best to wait and see what things are gonna look like.

Now by all means, open one, get the thousand dollars, or get the two hundred and fifty. Free money is free money. But, again, you just need to be careful from a state perspective kinda how we’re gonna treat that going forward.

Last question, Brian, I think it’s a good one. Can you change the beneficiary of a Trump Account before their age eighteen? Is there any convention for making a change to the beneficiary?

No. You I mean, so the beneficiary during the growth period is the child that you set up the account for. They can then pick a beneficiary of their own account, but you can’t change the beneficiary. So it’s not like a 529 plan where you can change the beneficiary, you know, mid stroke.

Once the account is set up for that person, it’s that person’s account. Now one other thing really quickly before we drop off, another disadvantage to consider too is these accounts are the kid’s money. So once they reach age age eighteen, they can do whatever they want to with it. So, if you’re worried about the child being a spendthrift, then you’re gonna wanna take that into consideration as well because once they reach eight eighteen and they can take distributions, they can fully liquidate the account, go buy a Ferrari or something, I don’t know, and, you know, totally waste the money that you’ve been trying to save up and allow that compounding to work.

So best laid plans. Right?

Alright. Thank you all for attending today’s webinar on 529 plans and Trump Accounts. There were a lot of questions we didn’t get to. They will be sent to your advisor for your advisor to reach out to you.

We will also Michael and I will get a list of all of those questions to help your advisors in answering any questions. Thank you again, and we will hopefully see you at the next one.