There’s been a lot of talk recently about the new “Trump Accounts” and as usual, a lot of misinformation is being bandied about.
A “Trump Account” resembles a traditional IRA mixed up with a Section 529 education savings plan account. Annual contributions (currently maxed at $5,000, but indexed for inflation) can be made on behalf of any qualified child until the year that the child turns age 18. (The child must be US Citizen with a Social Security number.) Contributions can be made by anyone. The bonus is that the US Government will contribute $1,000 for any child born between January 1, 2025 and December 31, 2028. Additional bonus, your small business (Schedule C, Partnership, Sub-S, or regular Corporation) can contribute up to $2,500 a year for each of your children, and it’s tax deductible! Also, other entities can contribute to Trump accounts with no limits. It can only be invested in certain mutual funds and exchange traded funds though. The earnings are accumulated tax-deferred. Withdrawals are not permitted until the child turns 18. At age 18, the account is converted to a regular IRA. (That means, any withdrawals before the child turns 59 ½ are subject to the 10% early withdrawal penalty and well as regular income tax.) NOTE: If the child uses these funds for higher education , they will not incur the 10% early withdrawal penalty, but will pay regular income tax on the withdrawal. Any withdrawals from a 529 account, are not subject to paying any income tax.
A regular traditional IRA requires earned income to have anything contributed. Not a problem for older children who can get a job, or younger children who work for your small business. It starts out and continues with all the regular IRA rules about distributions (must be 59 ½ to withdraw without penalty, etc.) Of course, once again, a child can use their IRA funds for funding higher education and avoid the early withdrawal penalty, but still have to pay regular income tax on the withdrawals.
A regular 529 account can have unlimited contributions made (as long as you can justify the child’s expected future higher education costs) and you need to file a gift tax return if you currently give more than $19,000 per year. The child can use up all the funds they need in a 529 account for higher education, and any unused 529 funds can be converted to a ROTH IRA.
So, which is best? If you are not in a position to “hire” your child when they are young, then a Trump Account might be best, but you can only put in a current maximum of $5,000. The current maximum contribution for an IRA is $7,500. If your goal is for your child to have funds available for use in higher education costs without paying any income tax when withdrawn, then a 529 plan is the ticket.
Have you heard? 2 Corinthians 12:14b says, “For children are not obligated to save up for their parents, but parents for their children.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459. As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.
