How Trump Accounts Give Children A Head Start in Retirement
When families think about saving for their children, college is often the first goal that comes to mind. But a new type of account creates an opportunity to think much further ahead – all the way to retirement.
Trump Accounts are designed to give children an early start on long-term investing. For eligible children born between January 1, 2025, and December 31, 2028, the federal government provides a one-time $1,000 contribution. Families can then make additional contributions of up to $5,000 per year, subject to inflation adjustments.
What makes these accounts particularly interesting from a financial planning perspective isn’t simply the initial contribution. It’s the amount of time that money may have to grow.
The Biggest Advantage: Time
When it comes to long-term investing, starting earlier can make a significant difference.
Unlike a Traditional IRA or Roth IRA – which generally requires an individual to have earned income in order to contribute – a Trump Account does not require the child to have wages or earned income for annual contributions to be made before age 18.
That gives parents and grandparents an opportunity to begin investing for a child’s future years before that child enters the workforce.
Consider what could happen if a family contributed the maximum $5,000 annually and the account earned an average annual return of 8%. Including the $1,000 government contribution for an eligible newborn, the account could potentially grow to approximately $196,000 by age 18.
Of course, an 8% return is an assumption rather than a guarantee, and actual investment performance will vary. But the example illustrates an important financial planning principle: when money has decades to compound, getting started early can have an outsized impact.
And age 18 doesn’t have to be the finish line. It could simply be the beginning of the next stage of the child’s long-term financial plan.
Could a Roth Conversion Be the Next Step?
For those that are financially savvy, Roth conversions start after age 18.
Because the beneficiary may be in a relatively low tax bracket during their younger years, there may be opportunities to strategically convert assets and pay taxes at lower rates than they could face later in life.
There are important tax considerations, however, including the potential impact of the kiddie tax until age 24. Roth conversions should therefore be evaluated carefully based on the beneficiary’s individual circumstances rather than treated as an automatic next step.
When appropriate, the potential long-term benefit can be significant. Assets converted to a Roth IRA could potentially continue growing tax-free for decades, assuming applicable requirements are met.
And when the investment horizon stretches from childhood into someone’s 50s or 60s, those decades matter.
Where Does a Trump Account Fit into Financial Planning?
A Trump Account is another tool families can consider, but that doesn’t necessarily make it the right account for every goal.
The best savings vehicle depends largely on what you want the money to accomplish.
For example, families primarily saving for qualified education expenses may still find a 529 plan better suited to that goal. A custodial brokerage account may provide greater investment flexibility. And once a teenager begins earning income, a Roth IRA can become a powerful retirement savings option.
Once the beneficiary turns age 18, the Trump account is now controlled by the beneficiary and essentially is treated similarly to a Traditional IRA.
Thinking differently about your legacy
For parents and grandparents, a Trump Account may also create an opportunity to think differently about financial legacy.
Leaving money to the next generation doesn’t always have to mean waiting until an inheritance is received decades from now. Families may be able to begin transferring financial resources and knowledge much earlier.
Contributing to an account for a child or grandchild can become an opportunity to teach them how investing works, show them what happens when money is given time to compound, and help establish good financial habits before they begin managing their finances independently.
That can make the account part of a much larger conversation about how your family approaches money and what you hope to pass from one generation to the next.
No solution is a perfect one-size-fits-all, so it is important to have a deeper discussion with a Certified Financial Planner® to discuss how this may work in your family. Chatterton & Associates is here to help you understand and navigate your financial, retirement, tax, and estate planning needs.
About the Author: Eric Oh, ChFC®, CFP®, ChSNC®
Eric firmly believes that part of being a Certified Financial Planner™ is putting the client’s interests above all. This is achieved by listening to the client’s specific needs, then devising a plan that’s designed to help them achieve long-term success. Client service is the key to client satisfaction, which is why he continuously strives to build long-lasting professional and personal relationships with his clients.
