What are the key features and limitations?
Trump Accounts share some similarities with traditional IRAs, but there are a few key differences to be aware of. During what is known as the “growth period,” investments are limited to mutual funds and exchange-traded funds (ETFs) that track an index of primarily U.S. companies. Sector-specific and leveraged funds are not permitted. Investment fees during this time are capped at 0.1%.
What are the contribution rules?
Unlike a traditional IRA, these accounts do not require individuals to have earned income to make contributions. Funding can come from family and friends, employers, charitable organizations and the initial pilot program.
Total contributions are limited to $5,000 annually per beneficiary (indexed for inflation beginning in 2028) and are made on an after-tax basis.
Employers may contribute up to $2,500 per year for an employee’s dependent child, which counts toward the annual contribution limit of $5,000 for a given year. If an employee has several kids under the age of 18, the employer may choose to split the contribution among children.
Contributions from charitable organizations and government entities are treated differently. These contributions are not subject to a dollar limit and do not reduce the amount that individuals or employers can contribute.
How do you open a Trump Account?
An election to establish a Trump Account may be made by filing Form 4547 with the Internal Revenue Service (IRS) or through an online portal. The election can be submitted by an authorized individual in the following order of priority: legal guardian, parent, adult sibling or grandparent.
When electing to receive the $1,000 government seed contribution, the individual opening the account must reasonably expect the child to qualify as their dependent for the applicable tax year. Only one account may be opened per beneficiary.
Accounts will initially be opened by financial institutions designated by the U.S. Treasury. After submitting the election, the authorized individual will receive instructions to register and activate the account through the Trump Accounts app, available to download on the App Store and Google Play.
How are these accounts treated while the beneficiary is a minor?
From the time a Trump Account is opened through December 31 of the year before the child turns 18, it is in the “growth period.” During this time, the account is generally intended to remain invested, and withdrawals are not allowed.
The main exceptions are limited to certain rollover transactions, including transfers to another Trump Account or to a qualified Achieving a Better Life Experience (ABLE) account. It’s important to note that rollovers to an ABLE account are limited to the year the beneficiary turns 17.
What happens when the beneficiary turns 18?
On January 1 of the year the child turns 18, the account enters the “post growth period” and the beneficiary takes over ownership. At that point, the beneficiary may maintain the account, roll it into a traditional IRA, convert it to a Roth IRA or take distributions. Any additional contributions are subject to standard IRA rules and limits. While a Roth conversion may be appealing during these low income years, it is key to consider potential “kiddie tax” implications if the beneficiary is still claimed as a dependent.
Distributions taken before age 59½ may be subject to a 10% early withdrawal penalty unless an exception applies; for example, qualified educational expenses or up to $10,000 for a first-time homebuyer. The taxability of distributions will depend on several factors, including the types of contributions made and any investment earnings. In most cases, a portion of distributions will be subject to ordinary income tax. A tax advisor can help determine the appropriate treatment.
