During President Donald Trump’s recent State of the Union Address, you may have caught his description of the soon-to-launch “Trump Accounts” as “tax-free investment accounts for every American child.” The President’s proposal includes a $1,000 government-funded seed deposit for eligible children, but the term “tax-free” isn’t always straightforward. Our CEO and Senior Wealth Advisor, Marianela Collado, CPA/PFS, CFP®, CDS®, was recently quoted in a CNBC article, and discussed if the tax rules could be more nuanced than they seem.
What is a Trump Account?
A Trump Account is an investment account in which the initial capital is provided by government entities. The account is meant for children to receive an economic headstart through early investments. Eligible children will receive a one-time $1,000 contribution, then additional contributions can be made by parents, employers, or even philanthropists. Generally, funds cannot be withdrawn until the child reaches the age of 18, as it will function similarly to a traditional retirement account.
Are Trump Accounts Actually Tax-Free?
Different contributions have different methods of taxation. The initial $1,000 government contribution will be pre-taxed, which means that taxes will be owed when the money is withdrawn. On the opposite side of the spectrum, contributions made by parents or guardians are made with after-tax dollars. These contributions may not be taxed again at withdrawal if properly tracked. Lastly, investment growth will grow tax-deferred, which means there will be no annual capital gains or dividend taxes. Earnings would be taxed as regular income when they are withdrawn. Funds put into these accounts may grow without annual taxes, but withdrawals may trigger income taxes later. This means the accounts are not permanently tax-free, but rather tax deferred.
Why the Tax-Free Label Can Be Misleading
“I would certainly welcome anyone to put their money in there for my kids, but I can find a few other vehicles that are much more tax advantageous,” Marianela shares. Though these accounts are advertised as tax-free, taxes are not eliminated, just deferred. Families could possibly owe income tax when the funds are withdrawn, and future tax rules could change before today’s children have access to their funds.
How Do Trump Accounts Compare to Other Options?
If you want to open an investment account for your child, there are alternatives that provide different benefits. 529 College Savings Plans can provide tax-free withdrawals if the funds are used for qualified education expenses. Additionally, there are Roth IRAs for Working Teens, which can offer after-tax contributions and tax-free qualified withdrawals. Lastly, Custodial Brokerage Accounts can offer flexibility but are taxable annually. Before choosing an account or relying on one, it could be helpful to consider the intended goal of the savings, how taxes might affect withdraws, and how fees impact returns. Accounts can work as tools rather than standalone solutions.
The Bottom Line
Though Trump Accounts may be described as tax-free, that doesn’t mean that you’ll never pay taxes on the funds. Most contributions are tax-deferred, not permanently tax-free. The $1,000 initial investment is provided to eligible children, but long-term benefits may depend on additional, continuous contributions. As Marianela shared, other savings vehicles may offer more targeted benefits depending on your goals, but there is no one-size-fits-all answer. Every family is different and may require different methods of investment. If you’d like to learn more about how Trump Accounts could fit into your plan or chat about your specific situation, we invite you to reach out and contact us. We’re here to help you build a plan that works best for your goals.
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