Recently the Administration went on a PR junket to highlight the newly established “Trump Accounts.” These accounts were created when the One Big Beautiful Bill Act passed last summer, and they establish a long-term savings vehicle for every American child born between January 1, 2025, and December 31, 2028.
The IRS describes these accounts as a type of “traditional individual retirement account (IRA) that is established for the exclusive benefit of an eligible individual.”
How do they work?
If you had a baby last year, you are entitled to open an account. Once it is open, the government will make a one-time deposit of $1,000. Parents and employers can make additional contributions of up to $5,000 per year until the child turns 18, though employers are limited to $2,500. (Contribution limits will be indexed to inflation starting in 2027.) Like a retirement plan match, if an employer establishes a contribution program, the contribution will not count toward the employee’s taxable income.
When and where can I open an account?
Although they won’t officially launch until July, you can get a head start and enroll when you file your taxes with IRS Form 4547. We don’t have details on where these accounts will be held, but IRS guidelines note that the investments inside will be comprised of mutual funds or exchange-traded funds (ETFs) that track an index of primarily U.S. companies, like the S&P 500. Importantly, the fund’s annual fees and expenses can’t exceed 0.1 percent.
How do you get the money out?
During the growth period, no distributions may be made from a Trump account, “except for qualified rollover contributions, qualified ABLE rollover contributions, distributions of excess contributions, and distributions upon death of the account beneficiary.”
When beneficiaries reach age 18, they become the owner of the account and can withdraw money for qualified expenses like education, a first home purchase, or starting a business. However, the money that is withdrawn will be taxed based on the tax bracket of the beneficiary at the time of withdrawal.
Should I use a Trump Account or a 529 plan to save for education?
The taxation of the Trump Accounts makes 529 accounts a better alternative if you are saving for private school or college. The reason is that 529 offers TAX FREE investing for qualified education expenses, while investment earnings in Trump Accounts are taxed when withdrawn.
Some states also offer a state income tax deduction for 529 contributions. As a reminder, if you don’t use all of the money saved inside of a 529 plan for education, you can roll over up to $35,000 to a tax-free Roth IRA in the beneficiary’s name.
Will Trump Accounts count against me for federal financial aid?
Usually, assets in the student’s name have a greater negative impact on eligibility for financial aid than assets in the parents’ names. However, we will need guidance from the government as to the treatment of Trump Accounts.
According to StudentAid.gov, these are assets you need to report on the FAFSA:
— Money in checking, cash, and traditional savings accounts.
— Real estate. While FAFSA does not consider your parents’ primary residence an asset, you must declare the net worth of any additional property, including a vacation home, second apartment building, or rented-out property.
— Businesses. The net worth of any businesses your parents may own.
— Qualified educational benefits or education savings accounts such as Coverdell savings accounts, 529 college savings plans, and the refund value of 529 prepaid tuition plans.
— Non-retirement investments, including all stocks, bonds, mutual funds, or certificates of deposit (CDs) for which you are the owner.
— UGMAs/UTMAs that you own.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.
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