Trump Accounts: A Strategic Wealth Opportunity for Your Children
At Tangible Accounting, PLLC, we often discuss the importance of asset protection and laying the groundwork for generational wealth. Whether you are a family in West Palm Beach, a business owner in Phoenix, or a client in the DC metro area, the introduction of "Trump Accounts" under the Working Families Tax Cuts Act—often called the One Big Beautiful Bill Act (OBBBA)—presents a distinct planning opportunity. This legislation has created a new vehicle for American families to establish tax-advantaged savings for children under 18. Perhaps most notable is the pilot program offering a $1,000 government contribution for children born between January 1, 2025, and December 31, 2028.
Overview: What Are Trump Accounts?
Think of Trump Accounts as a long-term infrastructure project for your child's financial future. These are innovative savings vehicles that function similarly to Individual Retirement Accounts (IRAs) but are designed specifically to build wealth from birth. For children born within the 2025–2028 window, these accounts come with the option to receive a one-time $1,000 "seed" contribution from the federal government.
Beyond the seed money, the structure allows for additional contributions of up to $5,000 annually (adjusted for inflation) until the year before the child turns 18. To ensure consistent growth, the funds are invested in broad, low-cost stock market index funds. This creates substantial potential for compounding over nearly two decades before the beneficiary reaches adulthood.
Eligibility and Contribution Rules
Inclusivity is a key feature of this program. Any child under the age of 18 with a valid Social Security number is eligible to have a Trump Account. The account is technically managed by a parent or guardian until the child reaches the age of majority.
1. Who Can Contribute?
Broad Support Network: Contributions aren't limited to parents. Grandparents, extended family, friends, and even the children themselves can contribute to the account. The standard annual limit begins at $5,000 per child, with future inflation adjustments expected.
Tax Treatment of Contributions: Generally, contributions made by individuals are not tax-deductible.
Employer Participation: Employers can contribute up to $2,500 annually toward that $5,000 cap. This is a tax-efficient move: the employer receives a deduction for the contribution, and it remains non-taxable to the employee.
Safeguarding the Cap: Because contributions can come from so many different sources (grandparents in Arizona, an aunt in Virginia, or an employer in Florida), robust safeguards are essential to avoid exceeding the $5,000 annual limit. A centralized record-keeping system is necessary to monitor inflows in real-time. We advise that contributors coordinate or register planned contributions in advance to avoid "traffic jams" that trigger over-contribution flags. Automated alerts as the account nears the $5,000 threshold are highly recommended to prevent unsolicited over-funding. Clear communication among family members regarding who is contributing what is crucial to maintaining the integrity of the account and avoiding compliance missteps.
2. "Qualified Class" Contributions
The legislation also enables qualifying charitable organizations and government entities (states, tribes, localities) to contribute. However, these entities must designate a "qualified class" of beneficiaries. Rather than funding specific individuals arbitrarily, they must direct funds to a defined group—for example, all children born in a specific year or residing in a specific geographic area.
This framework empowers philanthropic organizations to make systemic contributions to the financial development of eligible children.
Example: Michael and Susan Dell, through the Michael & Susan Dell Foundation, are contributing $6.25 billion to seed Trump Accounts with $250 for children who are 10 or under who were born before Jan. 1, 2025. The pledged funds will cover 25 million children age 10 and under in ZIP codes with a median income of $150,000 or less.
The $1,000 Government Seed Contribution
For many families, the headline feature is the federal government's one-time $1,000 contribution. This seed money is designed to provide a financial jumpstart through long-term market exposure. However, it applies to a specific cohort.
Birth Date Range: The child must be born on or after January 1, 2025, and before January 1, 2029.
Citizenship: The child must be a U.S. citizen with a valid Social Security number.
Active Election: The account is not automatic; a parent or guardian must elect to open the Trump Account.
One-Time Nature: This is a singular initial deposit of $1,000. The government does not make recurring payments.
Cap Exemption: Importantly, this $1,000 does not count toward the annual private contribution limit (currently $5,000).
Tax Status: While this seed money grows tax-deferred, it is considered pre-tax money. It (and its earnings) will be taxed as ordinary income when withdrawn after age 18.
Note that children born outside this window (e.g., before 2025) are still eligible to have a Trump Account opened and can receive employer or charitable contributions, but they will not receive the $1,000 federal seed grant.
Investment Strategy
Simplicity and cost-efficiency are the guiding principles here. Trump Accounts are restricted to specific investment rules: funds must be allocated to broad U.S. equity index funds. These funds cannot use leverage and must charge minimal fees. The goal is to strip away complexity and ensure transparency while capturing the historical growth potential of the U.S. economy.
Tax Implications
Understanding the tax nuance is critical for effective planning. The account functions as a hybrid: contributions are generally non-deductible (like a Roth IRA), but earnings grow tax-deferred (like a Traditional IRA). Once the child turns 18, standard IRA withdrawal rules apply, including potential taxes and penalties.
Distributions Before Age 18
Generally, you cannot touch these funds until the beneficiary turns 18. This lock-up period ensures the capital is preserved for adulthood. In the tragic event that a child passes away, funds can be transferred to the child's estate or a designated survivor beneficiary. We recommend having clear directives in place to handle such transfers smoothly.
Distributions After Age 18
Once the beneficiary is an adult, withdrawals are treated in two parts:
After-tax contributions: Money contributed by parents or relatives can be withdrawn tax-free because the tax was paid upfront.
Pre-tax amounts: This includes investment earnings, the $1,000 government seed, and employer or charitable contributions. These are taxed as ordinary income upon withdrawal.
Penalties: A 10% early withdrawal penalty applies to taxable distributions taken before age 59½.
Exceptions to the 10% Penalty
While the pre-tax portion remains subject to income tax, the 10% penalty is waived for specific "qualified expenses":
Higher Education: Tuition, books, and fees for post-secondary education.
First-Time Home Purchase: Up to $10,000 for a down payment.
Birth or Adoption: Up to $5,000 for qualified expenses.
Disability: Expenses related to the beneficiary's disability.
Other: Scenarios involving terminal illness or disaster recovery.
Account Management and Transfers
To initiate this process, guardians must use IRS Form 4547, Trump Account Election(s). Alternatively, an online application at trumpaccounts.gov is expected to launch mid-2026. Please note that accounts cannot begin accepting contributions until July 4, 2026.
Initially, these accounts are held with the Treasury's designated agent. However, once established, they can be transferred to a preferred brokerage. This transferability allows you to consolidate finances and select an institution that aligns with your service preferences.
IMPORTANT FILING REQUIREMENT If you have children under age 18 and wish to elect a Trump Account, Form 4547 must be filed with your tax return. The form accommodates two children per page, and you may file multiple forms if necessary. It requires the parent/guardian's name, SSN, and contact info, as well as the child's name, SSN, date of birth, and home address. |
If you need assistance filing Form 4547 or have questions about how these accounts fit into your broader asset protection and family wealth strategy, please reach out to us at Tangible Accounting. We are here to help you navigate these new changes.
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