Q: During the Super Bowl we saw an ad announcing the Trump Accounts that can be established for kids. My wife and I were happy to see it because we have two grandchildren and one “on the way.” These sound like a win so can you provide the fundamentals of these new account opportunities? Any drawbacks? Great game and the best ad of the year.
A. Well, I beg to differ. While it was great that the game included the Trump Account ad, the best ad this year was, by far, was the Budweiser commercial. Back to beautiful and clever commercials starring Clydesdales with a sentimental message! The American eagle added a nice touch, too. Now that we have that settled, dear reader, Trump Accounts are a great thing and it involves free money for kids. On this point we absolutely agree, it is a win-win.
Parents, grandparents and even generous friends can open these brokerage accounts on behalf of children or grandchildren. The parent, grandparent or friend acts as custodian of the account until the child turns 18. During this time, the funds can be invested and, provided the market cooperates, will continue to grow. Investments in the accounts are limited to low-cost index funds or exchange-traded funds which are diversified and track the U.S. stock market. Not a bad way to invest in any situation.
Parents, grandparents, friends and even employers can contribute up to a combined $5,000 per year. In addition, the government can contribute $1,000 as seed money. On Jan. 1 of the year the child turns 18, ownership is transferred to the child. If the child withdraws funds, it is taxed much like withdrawals from an IRA which can include both income taxes and a 10% withdrawal penalty. The exceptions are that if the funds are used for education, a home purchase or starting a business, the restrictions on withdrawals are lifted. If the child waits until age 59 and a half, the 10% penalty is lifted.
To open the account, the child must have a Social Security number and to receive the $1,000 seed money from the government, they must be born between Jan. 1, 2025, and Dec. 31, 2028. It is hoped that if enough of us take advantage of these accounts, the qualification dates for government seed money will be extended.
Some predictions show that if an account is opened for a newborn is left to grow until a retirement age of 67 or older, the account could be worth over $750,000. Despite adjustments for inflation, it is still not a bad nest egg for retirement.
As an employer, I view this as just one more way to benefit good employees and help them fund their children’s education and future financial welfare. If you are interested in pursuing a Trump Account for your children or grandchildren, speak with your investment advisor or tax advisor who can guide you through the process of applying for the seed money and the proper reporting of the accounts.
Drawbacks? The only drawback I see with the structure of the Trump Accounts is that they can only receive the seed money if the child is born between the short window dates mentioned. However, anytime we can encourage education, home ownership, and entrepreneurship in children is a win in my opinion.
Liza Horvath has over 30 years of experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust Management Company. This is not intended to be legal or tax advice. If you have a question call (831) 646-5262 or email liza@montereytrust.com
