Trump Accounts for Kids: A New Savings and Investing Tool — But Is It Right for Your Family?
One of the more talked-about features of the recently passed tax legislation is the introduction of "Trump Accounts" — a new type of savings/investment account intended to give children a financial head start. If you have young kids or grandkids you may be wondering whether this is something worth paying attention to.
Without getting into politics or evaluating the law/accounts directly, here’s a plain-English look at these accounts and why they may or may not make sense for your family.
The Problem They’re Trying to Solve
Many Americans reach adulthood trying to play catch up from the start. Confronted with student loans, rent, and the challenge of building savings from scratch in your 20s and 30s, it can be easy to feel overwhelmed.
Trump Accounts were enacted with the intention of helping with this issue by:
Giving children a government-seeded investment account from birth
Allowing family members, employers, and others to contribute to the account over time
Providing a pool of invested capital that grows over decades before the child reaches adulthood
The core idea is: the earlier money is invested, the more time it has to grow. A modest amount invested at birth and added to through time has significant potential — thanks to the power of compounding.
Should I Open a Trump Account?
To be clear, if your child qualifies for the free $1,000 contribution from the government, you should at least open a Trump Account for these funds. After this though, it gets more nuanced. Trump Accounts may not be the most efficient tool in your toolbox. Depending on your situation, you may already have more effective options available, such as:
529 education savings plans
Custodial accounts (UGMA/UTMA)
Custodial Roth IRAs
Keeping money in your name but have reserved for a child
Irrevocable trusts and dynasty trusts for multi-generational wealth transfer
Annual gifting strategies that reduce your taxable estate over time
Whether a Trump Account makes sense depends on your future goals, tax situation, your estate planning goals, and what you’re already doing for the children or grandchildren in your life. For example, if you are setting aside money for education specifically, or for any use by a child, or for estate planning/tax reasons, different approaches should be evaluated.
Not Sure If This Applies to You?
We’re paying close attention to Trump Accounts and how they fit into comprehensive planning strategies. If you have questions about whether this is worth exploring for your family, we’d be happy to talk it through.
There is a lot of information and opinions coming out regarding these accounts as we continue to learn more about them. Items such as post-tax contributions mixed with pre-tax contributions and pre-tax growth, fund accessibility, limited investment options, roth conversion strategies and kiddie tax implications among others should be considered.
At Beacon Financial Strategies, we help families in Raleigh and across the nation think through decisions like these in the context of their full financial picture — not in isolation. Reach out to schedule a conversation, and we’ll help you figure out whether a Trump Account belongs in your plan.