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Trump Accounts are here and they offer some significant advantages. For young parents, they can be a great way to kick-start their children’s nest egg. Children born between 2025 and 2028 are usually eligible to receive a one-time $1,000 seed deposit from the government.
These accounts have features that are somewhat similar to a traditional IRA. Technically, they are a type of traditional IRA! However, there is no tax break for contributing to the accounts. Contributions are usually made with after-tax dollars and then sheltered from taxes during the growth period, which ends in the year the child turns 18.
There is a maximum contribution of $5,000 a year to these accounts and contributions can be made by parents and relatives. Employers can also contribute and have their own maximum contribution amount of $2,500. However, this would count toward the total maximum of $5,000. The initial $1,000 seed deposit for those born between 2025 and 2028 doesn’t count against the annual contribution limit.
No income required. The tax-deferred growth of the account over a substantial period can be a major advantage of the Trump Accounts. Once the child reaches age 18, the Trump Account begins to play by all of the rules of a traditional IRA.
However, unlike Roth IRAs for minors, contributions to the account aren’t dependent on the child having earned income. This is a major difference as earned income for young children can be a tough hurdle to overcome for a child to begin saving in a Roth.
As the child turns 18, the account becomes eligible for conversion to a Roth IRA. Roth IRAs pose some noteworthy advantages. Funds grow tax-free in a Roth IRA and qualified withdrawals can be distributed tax-free upon reaching age 59.5.
Roth conversions. Converting funds to a Roth IRA would result in a taxable event. The taxable portion of the account would be taxed as ordinary income, while the principal (which was made with after-tax dollars) won’t be taxed. The $1,000 seed deposit would be taxable along with any employer deposits to the account.
When it comes to the conversion, the key is to be aware of the Kiddie Tax. The Kiddie Tax may apply to children who are under 18 with over $2,700 in unearned income, along with 18-year-olds and full-time students between the age of 19 and 23 when their earned income isn’t providing more than half of their own support. The Kiddie Tax essentially means unearned income above $2,700 will be taxed at the parents’ rate.
Even with this, there is the opportunity for conversion. Many people in their mid-20s pursue advanced degrees without being fully employed.
For a 24-year old with no income pursuing a graduate degree, the conversion opportunity could offer some substantial tax arbitrage and could potentially even allow for some of the funds to be converted with minimal tax at all. In the event the child is no longer eligible to be claimed as a dependent, their standard deduction would be that of a single filer.
While we cannot predict future tax rates, we can apply today’s figures to the situation. The current standard deduction is $16,100. This means that the first $16,100 in income (or in this case the earnings from the Trump Account) wouldn’t be taxable. From there, for 2026, the 10% federal tax bracket is applicable to the next $12,400 in income.
Covering the tax liability. In the event Kiddie Tax cannot be avoided due to the child’s age, the parents can consider gifting the tax liability to the child for the conversion.
This would keep the full amount eligible to be directed to the Roth IRA intact. Essentially, the parents would elect to gift the child the exact amount of tax owed on the conversion which allows for the full amount to reach the child’s Roth IRA without the need for the child to withhold for taxes themselves.
In conclusion. Trump Accounts offer a great new way to save for young children. But the appeal isn’t only the tax-deferred growth during childhood, it is the potential to pair that compounding with Roth conversions in low-income years.
When advisors can pair a long-term time horizon with consistent investment returns and have the opportunity to tax-efficiently fund a Roth IRA, they should pay attention. The Trump Accounts, paired with conversion strategies, have the potential to compound for many decades and can serve as an amazing avenue to building up a child’s nest egg for retirement.
Clifford Cornell is a financial advisor at Bone Fide Wealth, a wealth management firm specializing in high achieving millennials and next-gen professionals. His newsletter, Yield to Maturity tackles financial issues facing Gen Z. Cliff is pursuing his M.B.A. at Stony Brook University and the Tax Planning Certified Professional designation.
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