Whether you’re a President Donald Trump supporter or critic, his modus operandi is probably obvious to everyone. He promotes big ideas – preferably with his name on them for posterity – but leaves it to others to figure out the details. With that in mind, let’s evaluate the Trump Account, his new signature savings program for children, to see if and how utilizing one might make sense. 

How do Trump Accounts (we’ll abbreviate the name to TA) work? They are very similar to Individual Retirement Accounts (IRAs) but with the following key differences:

• For any child born between 2025 and 2028, the federal government will contribute $1,000 to a TA.
• Both the parent (who manages the account) and the child must have a social security number.
• The parent’s employer can contribute up to $2,500 to the TA each year. It will not be treated as taxable income to the parent.
• Anyone else – relatives, strangers (e.g. Michael Dell), the children themselves – can also contribute to the TA. However, the contributions will not be tax-deductible. The maximum contribution limit from all sources is $5,000 per year which will be increased for inflation in the future.
• The TA must limit investment choices to low-cost mutual funds or ETFs investing in S&P 500 or other U.S. indices. There is little detail yet on which investment choices will be provided and which financial firms will be authorized to act as plan custodians.
• No withdrawals are permitted until age 18, at which point the plan funds will presumably be rolled over into a traditional IRA. From that point on all IRA taxation rules will apply.

Does this new type of savings account fill a gap that other individual savings accounts (529, IRA, Roth) have been unable to address? Probably the single most important goal parents have for their young children is a college education. Unfortunately, a TA is inferior to a 529 plan when it comes to saving for college. Contributions are treated the same for both types of accounts (non-tax deductible). But withdrawals from 529 accounts for education are both tax-free and penalty-free. TAs turn into IRA accounts at age 18, and withdrawals from IRAs are penalty-free but not tax-free when used for education. So it wouldn’t make sense to use a TA for that purpose.

What about saving for retirement? TAs do have two benefits that IRAs don’t. The first is a $1,000 gift from the federal government. The second is the ability to make contributions to the account without requiring the child to have earned income. A disadvantage is the limit on investment choices, although after age 18 that problem disappears if the TA becomes an IRA.

When compared to a Roth account, though, TAs fall significantly short. In both cases the contributions are treated the same (not tax deductible). But the growth in the Roth will be tax free for the rest of the child’s life, unlike in the TA which – whether kept or rolled over to an IRA – will be subject to income taxes on withdrawals at retirement.

What should a parent do with this new type of savings account? In my opinion you should set one up for every newborn child to get the free $1,000. But the structure appears to be unnecessarily complex. Further contributions to it would seem to make sense only after you’ve contributed as much as you need to a 529 plan and before the child (or parent for the child) is able to contribute to a Roth once the child is old enough to earn money (e.g. from babysitting, lawn mowing, or other legitimate jobs). I don’t see the value of having this additional savings vehicle with all its limitations. But as more details come to light, my viewpoint could change.

It probably would have been much cheaper for the government if Trump had simply proposed legislation to put the $1,000 into a Roth account for each child. But then he wouldn’t have his name on it.

(Artie Green is founder of Cognizant Wealth Advisors dba Perigon Wealth Management, LLC, a registered investment advisor. For more information visit cognizantwealth.com. More information about the firm can also be found in its Form ADV Part 2, which is available upon request by calling 877-977-2555 or by emailing compliance@perigonwealth.com).