Ep 271: Are TRUMP accounts a gimmick?

So by now, you've probably seen it somewhere, maybe on Facebook, maybe the news, maybe in your other social media feeds about the government giving your kid a thousand bucks.

And these are the Trump accounts.

They launched on July 4th, and I've had a couple people ask me about them.

And I actually got more questions about the Trump accounts than I did about the entire tax bill that created them.

The one big beautiful bill act.

And look, free money is free money.

And I'm not going to sit here and tell you that not to take the free money.

But today we're going to talk about what the Trump accounts are.

We're going to talk about 529 accounts, custodial Roth accounts, and UGMA UTMA accounts.

So if you don't know what all of these types of accounts are, we're going to give you some details today and help you to make the best possible decision for you and your children.

So I hope that you enjoy this episode.

Welcome to the weekly Wealth Podcast.

I am certified financial planner David Chudick.

This podcast and and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money.

We talk about financial strategies, prosperous mindsets, and simply how to build true wealth.

So come on and let's enjoy this journey together.

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Let's start with the account everybody's talking about, a Trump account.

So the Trump account is technically a new flavor of a traditional ira, but one that's opened on behalf of your kid from birth, if you want.

Now here's the mechanics.

If your child was born between January 1, 2025 and December 31, 2028, and they're a US citizen with a Social Security number, the federal government will drop $1,000 into the account once it's open.

That's the headline.

That part is simple.

So these are called the Trump accounts.

And like Trump or not, and people love them or they hate them, this is what he's put into place.

And I want to talk about the rules and I want to talk about the guidelines for these accounts.

So here's what's less simple about these accounts.

After that, seed money, the thousand dollars, anybody?

And we're talking Parents, grandparents, family, friends, your kid's rich uncle can contribute up to $5,000 a year.

Combined employers can kick in up to 2,500 of that, tax free to you.

But here is where it gets very interesting.

The $5,000 cap doesn't touch your child's ability to also max out a separate IRA if they have earned income.

Two different buckets, two different caps.

And most people have no idea that it's even legal.

Now, the part that I actually want you to pay attention to, this account has what's called a growth period running from birth until January 1st of the year that your kid turns.

During that entire window, the money is locked.

Not hard to get into.

It's actually locked.

No withdrawals, no exceptions for any reason for 18 years.

And while it's locked, it's not just sitting in cash.

The rules require it to be invested in a low cost US stock index fund.

That's actually a good rule, by the way.

Cheap, diversified, and no one's allowed to load it up with any kind of high fee garbage.

Then the day that your child turns 18, the account flips, it becomes a regular, traditional IRA.

Standard IRA withdrawal rules kick in, which means if they pull the money out before 59 and a half, they're generally looking at ordinary income tax plus a 10% penalty with a short list of exceptions like first time home buyer or higher education.

So on paper, freed seed money, tax deferred growth, forced discipline, because it's locked for 18 years sounds great, but that's exactly where I want you to slow down.

Because whether that's actually the right bucket for your family depends entirely on what the other three options bring to the table.

So in addition to these Trump accounts, many of you have already have some familiarity with the 529 plan because it's been the default save for college account for almost two decades.

So let's put it side by side with what we just covered.

A529 is built for one purpose and one purpose only, and that's education.

And because of that focus, it comes with real advantages the Trump account doesn't have.

Depending on your state, you may get a state income tax deduction just for contributing.

The money grows, tax deferred, same as the Trump account.

But when you pull it out for qualified educational expenses, it comes out completely tax free.

So this is not tax deferred, it's tax free.

Now, contribution limits are a little bit more generous.

We're talking numbers in the hundreds of thousands of dollars over the life of the account, depending on the state versus a Trump account with a $5,000 per year ceiling.

So where's the catch?

Well, flexibility or honestly, lack of it, if your kid doesn't go to college, and you know, who knows what college will look like 18 years from now.

So if your kid doesn't go to college, doesn't use all the money, or life just goes in a different direction.

Now you're dealing with penalties and taxes to get to that money out for anything other than qualified education expenses.

There are some newer workarounds, rolling a limited amount into a Roth IRA for a beneficiary, for instance, but there are rules and caps around that too.

I'm not going to pretend that's a simple move to just casually execute on your own.

So, Trump account, locked for 18 years, but flexible about what the money's eventually used for.529.

Potentially a bigger tax break, but locked into education as the purpose.

Different tools, different jobs.

Which is exactly why so many families will end up using both.

Now, incidentally, on the fafsa, which is the financial aid application that's currently used for college students, the amount of money that you have in your 529 plan can actually reduce the amount of grants and aid that you get.

So welcome to America.

Thanks for saving, thanks for making some sacrifices.

You get less free money.

Okay, rant over.

Now let's talk about the accounts that's been around for the longest and gets the least attention.

These are ugma U G M A or utma UTMA accounts.

These are the Uniform Gift to Minors act accounts or the Uniform Transfer to Minors act, depending on your state.

Here's the appeal.

There are zero restrictions on where the money can be used for.

So it doesn't have to be used for education, doesn't have to be used for retirement.

It could be used for braces for a car, a semester abroad, seed money for business, total flexibility.

But of course, in most types of investments, when there are more investment accounts, with flexibility comes a cost.

And with this one, it's a big one.

So first, this is a taxable account, so it's not tax deferred like the Trump Account or the 529Account.

Investment gains are taxed as they're happened.

And there's something called the kiddie tax that determines whether the tax, whether it gets taxed at the kids rate or above a certain threshold at the parent's rate.

It's not as simple as kids pay less tax on everything, which is what a lot of people assume.

So we're not going to get into those details, make sure you're working with your financial advisor or your tax advisor to determine so you don't get hit with a surprise if your child's custodial account will be taxed at your child's rate or at your rate.

Now, second, and this is the one that catches most family off guard, the money legally belongs to the child from the moment it is deposited.

You are the custodian, not the owner.

And when the child hits 18 or 21, depending on your state, every single dollar becomes theirs.

No strings.

No say so from you.

No, let's talk about it first.

Now, let's say, hypothetically, your cute little baby ends up not walking the straight Narrow at age 18 or at 21, they now potentially might have access to tens or hundreds of thousands of dollars.

Now, in some cases, that can be a problem, right?

$10,000 Can buy $100,000 can buy some bad things.

So just understand that one of the potential negatives of the UGMA and UTMA accounts is that the child will have control of the money at either age 18 or 21, depending on the state.

And how it so here's the irony.

The Trump accounts and the UGMA UTMA accounts both hand control to the kid, just on different timelines and with different guardrails in between.

One forces retirement style discipline, the other doesn't force anything at all.

So if you're sitting there and realizing you've got two or three of these accounts already open and you're not totally sure if they're working together, that's exactly what a Vision call is for.

Head to www.weeklywealthpodcast.com vision and let's map it out.

So let's look at the custodial Roth ira.

And this is for kids with earned income and for the right family.

This one quietly beats all three of the others on pure math.

Okay, so the catch is right there in the name.

Your kid actually needs earned income.

So this has to be a real W2 job, self employment income, or, and we've talked about this before, getting legitimately paid through the family business.

But it has to be W2 income.

It can't be just getting paid quote on the side.

But if they have that earned income, they can contribute to a Roth IRA up to the lesser of what they earned or the actual limit, which is $7,500 in 2026.

That's a higher ceiling than the Trump account's $5,000.

And unlike the Trump account, which is tax deferred, this is tax free.

Growth and tax free qualified withdrawals, not deferred free forever on the money that's had potentially 50 plus years to compound before retirement.

There's no forced growth period lockup structure like the Trump accounts either.

Roth rules simply apply from day one.

Contributions can generally be withdrawn without penalty on the principal, and there's no jarring transition when they turn 18.

So why isn't everybody doing this?

Two reasons.

One, it only works if the kid has earned income, which most young kids don't.

So your three year old probably doesn't have a job.

And there's probably no legitimate way to get your 3 year old or your 2 year old or your newborn, your newborn, actual official W2 earned income.

And then the second one is that the paperwork and documentation to justify those contributions, especially if it's coming through a family business, needs to be done correctly or you're creating problems or potential problems with the IRS instead of a solution.

This is one of those technically simple, practically easy to mess up situations.

So let's get a little sneaky, let's get a little bit creative and let's go back to those Trump accounts.

Because there's a move buried in the fine print that some financial planners are already calling a legal backdoor into a Roth ira.

And it's a bigger deal than the thousand dollar seed money that's gotten everybody's attention in the first place.

So here's a setup, right?

Once your kid turns 18, that Trump account flips into a regular traditional IRA.

Now very important, the standard IRA playbook opens up, including the ability to do a Roth conversion.

This means that moving some or all of that pre tax balance into a Roth ira.

Now here's the thing though, you have to pay ordinary income tax on that amount you convert today or in the year that you convert it in exchange for the tax free growth and tax free withdrawals forever.

Now why does this matter so much for a Trump account specifically?

Because remember, a Trump account never required earned income to get funded.

So if you could have had a kid who never worked a single job, walked into age 18 with real money in that account, then converted to a Roth ira, something that was never possible before without earned income, that's the back door.

So here's the math, right?

And this is what makes it powerful.

If your 18 to 24 year old converts, while they're a broke college student, were just starting their career, they're likely sitting in one of the lowest tax brackets they'll ever be in.

So converting 5 or $10,000 at a 10 to 12% tax rate versus letting that money go taxed later on in life at 2432.

Whatever tax bracket they're in, that's not a small business.

There are some hypotheticals where a modest Trump account balance converted early and left alone compounds into six figures which in their Roth by their mid-20s and well into the million dollars by retirement.

Now here's where I earn my keep because this is not just a go do it situation.

A few landmines here.

1.

If your child converts while they're still a full time student and still counted as dependent, the kiddie tax can apply which may tax the conversion rate at your rate instead of theirs, completely defeating the purpose.

2.

Every dollar you convert has to be sourced correctly.

The thousand dollar government seed, employer contributions and charitable deposits are fully pre tax and taxable on conversion.

But money that came from parent and grandparent was already after tax and converting the second time without tracking it properly means potentially paying tax twice on the same dollar.

3.

Every conversion starts its own five year clock before it can come out tax free and penalty free.

So timing, multiple convers and this is all sitting on guidance that the IRS hasn't fully finished writing.

So yes, this might be the single most valuable planning opportunity buried in the Trump account.

It's also exactly the kind of multi year, multi variable decision where doing it wrong costs real money and doing it right takes coordination, not a Google search.

So here's the big question.

Which one should I actually use?

Well, here's what I'll save you from the headline version of this episode, which is just open a Trump account.

It's free money.

That's not wrong.

It's not wrong exactly.

It's just incomplete.

If I'm thinking about this in terms of the framework I talk about all the time, things like liquidity, longevity, legacy choice.

These four accounts aren't competing with each other, they're sitting in different buckets.

The 529 is legacy money earmarked for a specific outcome.

The UGMA UTMA is flexible, no restriction money with real risk attached to it.

The Trump account and the Roth are both long horizon longevity plays with a very different rulebook.

None of them are wrong.

But stacking all four without a plan is how families end up with four accounts, four sets of rules, four maybe misunderstood sets of rules, and zero actual strategy.

And that's before we even get into things that I didn't cover today, like how contributions interact with gift tax rules.

What happens if you've already got money in a 529 and want to know whether some of it should move or how these accounts gets treated.

If there's a divorce, a move to another state, a family business succession plan in the mix.

That's not a figure it all out on a Sunday afternoon situation.

That's a sit down and map it out scenario.

So if you've got a Trump account or a 529 account, or an old UTMA or an UGMA account that your grandmother opened and a kid with a summer job, all in the mix and you're not 100% sure they're exactly working together.

That's exactly what I do with families.

Head to theweeklywealthpodcast.com vision let's get a vision call on the calendar.

We can map out every account you've got for your kids or grandkids and make sure they're actually pulling in the same direction.

So as always, it is a privilege to put this content out for you.

It's a privilege to give you this information.

Like I said in every episode, I believe that how we handle our money should positively impact our lives and the lives of those around us.

And I don't know, like how can you better impact your children and your grandchildren's lives than by teaching them about some account types and by funding some of these account types.

Now, you don't always have to do thousands or tens of thousands of dollars per year.

A couple hundred dollars a year multiplied by eight years in growth can give your child, can give your grandchild a great start in life.

So that's, I think very important and I think that's something that we should all be thinking about until next episode.

I wish everybody a blessed week.

Make sure you're sharing the podcast with your friends, your family, your colleagues and your co workers.

Thanks everybody.

The information presented on this podcast is for general educational purposes only and does not constitute financial investment, legal or tax advice.

Parallel Financial is registered with the U.S. securities and Exchange Commission as a registered investment advisor.

Registration does not imply a certain level of skill or training, nor does it constitute an endorsement by the sec.

All investing involves risk, including the potential loss of principal.

Please consult a qualified financial professional before making any financial decisions.

And here is your bonus content for this episode at an age appropriate level, help your children to understand their accounts, help them to understand how much money they have, maybe time value of money, how much the money could grow to at certain ages, and even the rules about what will happen tax wise if they take the money out.

Again.

This has to be age appropriate, but I think it's a great thing for kids to understand money and to be taught money before they're really, honestly old enough to make really, really big and expensive mistakes.

Alright, have a great week.