Key facts
- New 'Trump Accounts' are being introduced for children's retirement savings.
- Accounts can be opened for minors by parents or guardians, with contributions up to $5,000 annually.
- A $1,000 U.S. Treasury seed bonus is available for eligible children born between 2025-2028.
- Funds grow tax-deferred, and withdrawals are subject to complex rules based on contribution type.
- The SECURE 2.0 Act allows 529 plan funds to be rolled into Roth IRAs after 15 years, up to $35,000.
A new investment account, referred to as 'Trump Accounts,' is set to launch on July 4, aiming to provide younger Americans with an early start on retirement savings. These accounts are designed as hybrid individual retirement investment vehicles that can be opened on behalf of minor children by their parents or guardians.
Parents can open a Trump account for each child under 18 and contribute up to $5,000 annually. The accounts can also receive funds from other individuals, employers, and charitable organizations. A four-year pilot program will offer a $1,000 government kicker for eligible children born between 2025 and 2028, provided they are U.S. citizens with a Social Security number.
These accounts feature a 'growth phase' from birth until the child turns 17, during which no withdrawals are permitted. After this period, the account becomes the beneficiary's property and is largely subject to traditional IRA distribution rules. Contributions are made with after-tax dollars, similar to Roth contributions, and are not deductible by the donor. Employer contributions, capped at $2,500 annually, are deductible for the employer and treated as pre-tax for the beneficiary, counting towards the overall $5,000 annual limit.
Charitable contributions are not subject to the annual limit. For example, the Michael and Susan Dell Foundation plans to award $250 to the first 25 million accounts opened. The $1,000 government seed money is intended to encourage asset ownership and long-term planning.
Once the beneficiary reaches age 18, withdrawal rules become complex. For instance, if a $90,000 account includes $30,000 in after-tax contributions and $60,000 in pre-tax funds or growth, and the beneficiary withdraws $20,000 for college tuition (an allowable exception), they must withdraw funds pro rata. This means two-thirds of the distribution would be subject to income tax, as only one-third of the account balance is after-tax basis.
An alternative strategy for grandparents concerned about an 18-year-old managing retirement funds involves custodial Roth IRAs, which require the beneficiary to have earned income. Under the SECURE 2.0 Act, funds from a 529 college savings plan, after being open for at least 15 years, can be rolled into a Roth IRA, with a lifetime maximum of $35,000 per beneficiary. Financial advisors recommend discussing money management and the long-term implications of early withdrawals with young savers.