Should You Even Touch the $1K in a Trump Account?
This past Fourth of July, many infants received a gift from Uncle Sam: $1,000 deposited into a new 530A retirement account, commonly known as a “Trump Account.”
The $1,000 comes straight from the U.S. Treasury and is available to all infants born between January 1, 2025 and December 31, 2028.
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The Basics of the 530A Account
That $1,000 in seed money, along with additional deposits, grow tax-deferred for the child. It’s important to note that the money doesn’t belong to the parents. It’s not supposed to pay for diapers or formula in the first year. It belongs to the child, with the goal of growing wealth.
It can cost an average of $320,000 to raise a child through age 18. The money won’t help with day-to-day expenses of raising a child. Perhaps that’s why only one in three Americans said the Trump Account seed money would make them more likely to plan on having a child, according to a recent survey from BadCredit.org.
The money can’t even be withdrawn until the child turns 18; the accounts were introduced to help jumpstart retirement savings for the newest generation. That’s an important goal, since 69% of Americans over the age of 50 right now worry about having enough savings for a comfortable retirement, according to a recent poll from Western & Southern Financial Group.
Still, with low maximum contributions of just $5,000 annually, Trump accounts aren’t likely to solve the anticipated retirement woes of younger generations. Instead, it introduces the question: What should your child do with the money in their Trump Account once they turn 18?
How Much Could a Trump Account Be Worth?
If your child receives the $1,000 in seed money and no one makes any additional contributions, the money is expected to grow to roughly $6,000 by the time they turn 18, based on historical S&P averages as calculated by TrumpAccounts.gov.
Based on these figures, if you or your child continued contributing $5,000 per year until they reached age 55, the money could compound to $13 million. Again, that’s based on historical S&P averages, not adjusted for inflation. Actual results may differ.
But is leaving the money in a Trump account, which generally operates like a traditional IRA, the best choice?
Your Child's Options for Using Their 503A Money
When the child turns 18, they can withdraw the money without penalties, at their ordinary tax rate, only for qualified expenses like education or a down payment on a first home. Other withdrawals would be subject to a 10% penalty.
They can also leave the money where it is to grow or they can convert it to a Roth IRA, an option that Deborah Walker, director, compensation and benefits, at Cherry Bekaert, said is worth considering.
“If a child over 18 has a year in which there is no taxable income (for instance, they’re attending school and not working), a conversion of this account to a Roth IRA would be a good idea as Roth IRAs do not have required minimum distributions at age 75 and will accumulate as tax-free income,” she said.
She noted that future legislation could change the viability of this strategy.
Of course, there’s also a solid case for leaving the money where it is to grow tax-deferred.
“My instinct would not be to move money simply because the child turned 18,” said Kyle Mostransky, of Mostransky & Associates.
He suggested asking three questions:
Is the money still compounding efficiently?
Are the tax consequences favorable?
Does moving the money improve the child’s lifetime financial outcome?
The answers will differ for every family and every situation.
A Teaching Opportunity
Mostransky also said parents could use the funds as a chance to show children the power of compounding. The account includes access to an app where children can track their investment and watch it grow.
“Give a child ownership in American enterprise early enough, leave it alone long enough and time becomes the greatest financial advisor they'll ever have,” Mostransky said. “The biggest mistake would be treating age 18 as a payday instead of the beginning of an investing lifetime.”
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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