Trump Accounts are tax-advantaged individual retirement accounts for children under 18, created under the One Big Beautiful Bill Act (OBBBA) to help families save for long-term goals. They combine features of traditional IRAs and 529 plans, allowing contributions from multiple sources and tax-deferred growth until the child reaches 18.
Contribution Rules and Tax Treatment
- Individual contributions (parents, grandparents, friends): Made with after-tax dollars; no deduction is allowed. Withdrawals of these contributions are tax-free, while earnings are taxed as ordinary income.
- Employer contributions: Up to $2,500 per child per year are excluded from the employee’s taxable income and deductible for the employer. Withdrawals of these contributions and their earnings are taxed as ordinary income.
- Government and charitable contributions: Not included in the child’s taxable income when contributed, but withdrawals are taxed as ordinary income.
- Qualified rollovers: Carry over the tax basis from the original Trump Account, preserving previously taxed contributions.
- The annual contribution limit is $5,000 per child from individuals, with employer contributions included in this cap, while government and charitable contributions do not count toward the limit.
Growth and Withdrawal Benefits
- Tax-deferred growth: Investments grow without annual taxation on dividends or capital gains during the growth period (birth to age 18).
- Withdrawal rules: Funds generally cannot be withdrawn before age 18. After 18, the account converts to a traditional IRA, and withdrawals are taxed as ordinary income. Early withdrawals before age 59½ may incur a 10% penalty, with exceptions for education, first-time home purchase, medical expenses, or disability.
- Roth conversion strategy: At age 18, the child can convert the account to a Roth IRA, paying taxes at likely low rates, allowing future growth and withdrawals to be tax-free.
Additional Advantages
- Flexibility: Funds can be used for higher education, first home purchase, small business, or retirement.
- Estate planning: Contributions reduce taxable estate for parents or grandparents while building wealth for the child.
- Kiddie tax protection: Investment growth is not subject to the kiddie tax during the growth period.
Comparison with Other Accounts
- 529 plans: Tax-free withdrawals for education but limited to educational use. Trump Accounts offer broader flexibility and Roth conversion potential.
- Custodial IRAs: Trump Accounts allow contributions without the child having earned income and provide employer contribution options.
Key Takeaways
- No immediate deduction for individual contributions, but employer contributions are tax-free to employees.
- Tax-deferred growth shields earnings from annual taxation until withdrawal.
- Roth conversion at 18 can maximize long-term tax-free growth.
- Multiple contributors (family, employers, charities) can fund the account, each with distinct tax treatment.
- Careful tracking of tax basis is essential to avoid double taxation on withdrawals