This week marks the 250th birthday of the great US of A. We hope you have fun plans to celebrate this milestone. As we aren’t party planners, but instead financial planners – this July 4th has our attention drawn to something new that goes live in conjunction with this year’s Independence Day. That is the birth of “Trump Accounts.” These new investment accounts give families yet another way to save for their child’s future while enjoying some tax benefits along the way. In many ways, these new accounts are an amalgamation of already existing account types, leaving us (and many of you) to wonder whether they should be on your list to consider, or whether the existing options are better suited for your needs. As is too often the case, the answer becomes, “It depends.”
To be clear, there are benefits to Trump Accounts and these benefits are seemingly well-intentioned. They can help provide for education, first-time homebuying, birth or adoption of children, and certain medical expenses – as well as general long-term savings. But they should not be seen as the salve for future financial security, nor do they have a place in every family’s financial plan.
As I have tried to think of ways to succinctly explain these to clients, a few key points have come to mind:
- They do provide new avenues for contributions from outside of your immediate family, including employers, non-profits, and even the government itself (in limited circumstances).
- They have to first be seen as a very early entry into saving for retirement, with a few early off-ramps available for certain circumstances earlier in life. In fact, if retirement savings is the primary goal, these are arguably the best account types available to a young child.
- They provide a one-stop shop to combine the benefits 529 Plans, Custodial Roth IRAs, and UTMA/UGMA accounts – but trying to combine all of these into one place does create some complications and drawbacks. For those with clear goals around education and retirement savings, the existing options may be a better fit.
- Contribution limits are relatively modest ($5,000, including any employer contributions), so for those looking to gift substantial amounts to their kids or grandkids, existing plan types may be a better option. Note that contributions to Trump accounts may in turn offset some of what you could otherwise contribute to these other accounts.
- There is still a lot we don’t know, as some of the rules are still being written or may continue to evolve as reality collides with good intentions.
- If you have a child born between January 1, 2025 and December 31, 2028 – it’s sort of a no-brainer to open an account, as you can elect to receive a one-time $1,000 government contribution into the account for this child. There is no obligation to add anything further to the account after receiving this government seed money.
Okay, so maybe that wasn’t so “succinct.” But perhaps that illustrates both the complexity of these accounts and the reality that good planning is highly personalized. Regardless, if this has piqued your interest in Trump Accounts or just saving for your kids more broadly, we encourage you to do two things:
- Review this great piece published by our friends at MFS. It looks further at the details, including a chart comparing these accounts with the existing options we noted above. For those of you who prefer a video, here’s a great resource from iShares.
- Reach out to us to discuss how any of these account types can fit into your family’s financial plan. While we cannot hold or manage Trump Accounts for you, we can certainly guide you through the process of getting started. And we have even more flexibility for how we support 529s, Roths, UTMAs, and more. Important note – only parents and legal guardians can open a Trump Account for a child. Grandparents cannot do so, but they can certainly make financial contributions.