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Not long after mastering sleep and feeding schedules, new parents will inevitably turn their attention to saving for their child’s education and future.
From 529 accounts to Roth IRAs, parents can choose from several options to help their children enter the world on strong financial footing, and starting this year, they’ll have another tool in their arsenal: Trump Accounts.
Starting in July, parents or guardians of children who have not turned 18 by the end of the year can open and contribute to a tax-deferred investment plan that resembles a traditional retirement or education account, with some important differences.
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Like a traditional IRA, a Trump Account grows tax-deferred, with earnings taxed upon withdrawal and early penalties before the age of 59½.
So far, the biggest benefit of opening a Trump Account is for new and expectant parents. Children born from January 1, 2025, through December 31, 2028, might be eligible for a $1,000 federal grant to seed their new account.
A complement, not a replacement
While Trump Accounts might be helpful to parents as they begin helping their children build their retirement nest egg, they aren’t necessarily a replacement for educational funds such as 529 accounts or traditional IRAs. There are several important differences between these types of accounts.
Unlike 529s, which grow tax-free, Trump Accounts are taxable upon withdrawal. Additionally, parents and other contributors are limited both in how much they can give — contributions are capped at $5,000 per year, per child (indexed to inflation), which is less than traditional IRA maximums — and in the types of investments you can make.
Investments in Trump Accounts must be used only for certain broadly diversified, low-cost investments such as index funds, exchange-traded funds (ETFs) and other investment vehicles that track broad-based U.S. equities.
With Trump Accounts, withdrawals are permitted only once the account’s “growth period” ends on December 31 of the year the child turns 18. Withdrawals are subject to taxes and penalties. At that time, the account can be rolled into an existing IRA.
Prepare but maintain perspective
Despite many unknowns, new parents whose children would be eligible for the $1,000 federal grant can sign up by filling out IRS Form 4547 as part of their 2025 tax returns (even if you’re planning on filing an extension, you still need to file the form by April 15).
While it’s smart to take advantage of a potential government grant, we don’t expect that Trump Accounts will displace other types of investment vehicles. We continue to believe that traditional education vehicles are the best way to save for a child’s education, since they provide tax-free growth.
Additionally, with the passage of the SECURE 2.0 Act in 2022, parents who invest in a 529 account can overfund those accounts and roll over up to $35,000 into a Roth IRA, which will grow tax-free upon withdrawal at retirement.
Outside of 529 plans, most working-age children and their parents fund their retirement through a Roth IRA because of the significant tax advantages.
Do your due diligence
In these early stages, as we learn more about Trump Accounts, we don’t see much downside to filing the initial paperwork and being prepared.
There are still a lot of unknowns related to custodial procedures, so while awaiting regulatory guidance, we urge families to take the time to compare plans, understand the tax implications, educate family members or employers who have expressed interest in supporting these efforts and begin creating a contribution strategy.
The elephant in the room (pun intended) might be the political factor, given the naming of these accounts and the numbering of the IRS form.
Regardless of your political leanings, it can’t hurt to get your ducks in a row and prepare, especially if you’re a new parent or an expectant parent who would qualify for the $1,000 government grant.
Ultimately, any new vehicle that will help parents build a nest egg for their children is a good thing. Consider Trump accounts to be a potential new savings option for parents of young children that we can add to a growing list of accounts.
Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.
