Trump Accounts Explained: What Parents Need to Know

Transcript

Hi everyone. We've been getting a lot of questions recently about a new investment account for kids that people are calling the Trump account. The general idea is that these accounts are designed to let kids start investing basically from birth. So how does it actually work, and could there be a Roth IRA play later on? Let's talk about it.

If a child is born between January 1st, 2025 and December 31st, 2028, the government will put in a one-time $1,000 seed to get the account started. The account belongs to the child, but a parent or guardian manages it until they're an adult, similar to a UTMA-structured account. After that, parents, grandparents, relatives, even employers, if your employer plan allows it, can add money each year, subject to annual limits set by the program. That limit is $5,000.

Now, the money doesn't just sit there. It's invested in low-cost, diversified stock market index funds. No individual stocks, unfortunately, no wild strategies, probably not even sector ETFs like a tech ETF. Just think broad-market ETFs from an approved list, something like a total stock market ETF such as VTI, or an S&P 500 ETF such as SPY. That's on purpose. It's meant to be simple, low-cost, and long-term. Kind of boring, but boring goes with long-term wealth.

Here's how the taxes work. You're contributing after-tax money, so there's no deduction upfront. While the account grows, it's tax-deferred, meaning you're not paying annual taxes on gains or dividends. When money comes out later, the earnings are generally taxed as ordinary income. So it behaves kind of like an IRA, just without the tax break going in.

Now here's the interesting part. Once the child hits adulthood, this account is expected to transition into a retirement-style account like an IRA. At that point, a Roth conversion may be possible under standard IRA rules. Why does that matter? Because young adults usually have low incomes, and low incomes mean low tax brackets, which can make a Roth conversion very tax-efficient. And from there, future growth could be completely tax-free, all starting from that $1,000 seed investment.

Now, this isn't a magic account. Investment options are limited. Your child likely won't be able to access the funds until they're 18. It's designed for the long term, and depending on the goal, something like a 529 or a UTMA might make more sense for you. But it is a new way to start investing and potentially set up decades of compounding for your child. Bottom line, these accounts aren't good or bad by default. They're just another tool at your disposal. And in my personal opinion, if the government's going to give you $1,000, take it.

The IRS is creating a digital sign-up projected to be ready by July 2026, which is when the funding will start. So for now, you don't have to do anything. If you want more breakdowns like this, follow us for future videos, or reach out to discuss your family plan. The first conversation is just that, a conversation. See you next time.

Hosted byShane DuckworthPartner | Private WealthView bio →

Back to Clarity Corner