On October 1, the Treasury Department announced it completed automatic enrollment in Trump Accounts for millions of children. Culminating an effort that started outside of government, the accounts are aimed at providing the nation’s children with financial education as well as providing a way to grow wealth over time.
But what is a Trump Account, and what does it mean for parents and their children?
Now that Treasury has completed automatic enrollment, parents can begin the process of claiming their child’s account. This must be done in order to receive a one-time, $1,000 seed contribution from Treasury for children born between Jan. 1, 2025, and Dec. 31, 2028, and who have a Social Security number. Claiming accounts can be done on the Trump Accounts app, which will require that users verify their identity and relationship to the child.
The Trump Account operates very similarly to a traditional IRA in that the income tied to the account is not taxed until withdrawal. At the end of the “growth period,” the account is generally governed by IRA rules.
However, Trump accounts operate under certain special rules that differ from that of a traditional IRA. Contributions are capped at a combined $5,000 per year for all sources of contribution, according to the Internal Revenue Service. These contributions can be made by anyone, including parents, grandparents, employers, or any other third party. In addition, certain nonprofit organizations can make contributions to specified groups of children’s accounts.
Distributions from the account are not allowed during the “growth period,” which starts at the time the account is created and ends on January 1 of the year the child turns 18. From there, traditional IRA rules will generally apply, meaning there will be a 10% penalty for distributions before age 59 ½. However, there are important exceptions to that rule for expenses such as higher education costs, purchasing a first home, and some medical expenses.
First, contributions to a Trump Account are not tax-deductible to the contributor. Also, an employer can contribute up to $2,500 per year to an employee or an employee’s dependent’s account. This contribution is not included in the employee’s taxable income, although the $2,500 does count against the $5,000 annual limit for contributions.
When a distribution is made, the regular IRS IRA distribution rules will apply. This means that any earnings on the account will be included in gross income. In addition, the income is taxed at ordinary rates.
The main benefit from these accounts is the tax-deferred earnings also found in a traditional IRA. The earnings are not taxed until withdrawal and at ordinary rates. And while the eligible investments for a Trump Account are largely limited to “stock primarily in U.S. companies,” there is no tax penalty for changing the investments in the account, giving users more freedom over allocating their investments than they would find in other investment accounts, according to the Congressional Research Service.
Keep in mind that income generated from the Trump account will be taxed at ordinary rates.
Trump Accounts are an interesting development in the landscape of saving for children’s futures. There could be several benefits to contributing to one, and supporters note it could help bolster the child’s first steps into adulthood and managing finances. But there are a number of other options available to help children’s financial future that parents and grandparents should keep in mind, including options like 529 College Savings Plans and custodial Roth IRA’s for young people with earned income.
Like many issues involving taxes, it’s important to understand how Trump Accounts work and the tax implications. This is where consulting with a trusted tax professional can help ensure that understanding.
At Frost Law, our team works closely on a variety of tax and legal issues. Frost’s team can help people and businesses with questions. Frost Law can be contacted at (410) 497-5947 or schedule a confidential consultation.
On October 1, the Treasury Department announced it completed automatic enrollment in Trump Accounts for millions of children. Culminating an effort that started outside of government, the accounts are aimed at providing the nation’s children with financial education as well as providing a way to grow wealth over time.
But what is a Trump Account, and what does it mean for parents and their children?
Now that Treasury has completed automatic enrollment, parents can begin the process of claiming their child’s account. This must be done in order to receive a one-time, $1,000 seed contribution from Treasury for children born between Jan. 1, 2025, and Dec. 31, 2028, and who have a Social Security number. Claiming accounts can be done on the Trump Accounts app, which will require that users verify their identity and relationship to the child.
The Trump Account operates very similarly to a traditional IRA in that the income tied to the account is not taxed until withdrawal. At the end of the “growth period,” the account is generally governed by IRA rules.
However, Trump accounts operate under certain special rules that differ from that of a traditional IRA. Contributions are capped at a combined $5,000 per year for all sources of contribution, according to the Internal Revenue Service. These contributions can be made by anyone, including parents, grandparents, employers, or any other third party. In addition, certain nonprofit organizations can make contributions to specified groups of children’s accounts.
Distributions from the account are not allowed during the “growth period,” which starts at the time the account is created and ends on January 1 of the year the child turns 18. From there, traditional IRA rules will generally apply, meaning there will be a 10% penalty for distributions before age 59 ½. However, there are important exceptions to that rule for expenses such as higher education costs, purchasing a first home, and some medical expenses.
First, contributions to a Trump Account are not tax-deductible to the contributor. Also, an employer can contribute up to $2,500 per year to an employee or an employee’s dependent’s account. This contribution is not included in the employee’s taxable income, although the $2,500 does count against the $5,000 annual limit for contributions.
When a distribution is made, the regular IRS IRA distribution rules will apply. This means that any earnings on the account will be included in gross income. In addition, the income is taxed at ordinary rates.
The main benefit from these accounts is the tax-deferred earnings also found in a traditional IRA. The earnings are not taxed until withdrawal and at ordinary rates. And while the eligible investments for a Trump Account are largely limited to “stock primarily in U.S. companies,” there is no tax penalty for changing the investments in the account, giving users more freedom over allocating their investments than they would find in other investment accounts, according to the Congressional Research Service.
Keep in mind that income generated from the Trump account will be taxed at ordinary rates.
Trump Accounts are an interesting development in the landscape of saving for children’s futures. There could be several benefits to contributing to one, and supporters note it could help bolster the child’s first steps into adulthood and managing finances. But there are a number of other options available to help children’s financial future that parents and grandparents should keep in mind, including options like 529 College Savings Plans and custodial Roth IRA’s for young people with earned income.
Like many issues involving taxes, it’s important to understand how Trump Accounts work and the tax implications. This is where consulting with a trusted tax professional can help ensure that understanding.
At Frost Law, our team works closely on a variety of tax and legal issues. Frost’s team can help people and businesses with questions. Frost Law can be contacted at (410) 497-5947 or schedule a confidential consultation.
