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Trump Accounts: A Strategic Financial Opportunity for Your Children
With the enactment of the Working Families Tax Cuts Act—often referred to as the One Big Beautiful Bill Act (OBBBA)—the landscape of generational wealth planning has shifted significantly. This legislation introduces "Trump Accounts," a new vehicle designed to give American families a powerful head start on saving for their children. For eligible children born between January 1, 2025, and December 31, 2028, this includes a pilot program featuring a $1,000 government contribution.
At Adkin CPA, our promise to our Chapel Hill and North Carolina clients is to ensure you have the best legal tax position possible. Understanding how these accounts function is essential for small business owners and families looking to build long-term financial security for the next generation.
Overview of Trump Accounts
Think of Trump Accounts as innovative savings vehicles similar to Individual Retirement Accounts (IRAs), but designed specifically to build wealth from the moment a child is born. While any child under 18 can benefit, those born in the 2025 through 2028 window have the unique option of receiving a one-time $1,000 government seed contribution.
The structure allows for additional contributions of up to $5,000 annually, adjusted for inflation, until the year before the child turns 18. To maximize growth, these funds are invested in broad, low-cost stock market index funds. This strategy leverages the power of compound interest over nearly two decades, providing substantial growth potential by the time the child reaches adulthood.
Eligibility and Contribution Rules
Inclusivity is a key feature of the Trump Account. Any child under age 18 with a valid Social Security number is eligible, with the account managed by a parent or guardian. The funding rules are designed to be flexible, allowing a "village" approach to saving.
1. Who Can Contribute?
Family and Friends: Contributions can come from parents, grandparents, other family members, friends, or even the children themselves. The standard annual limit is currently set at $5,000 per child, which will adjust for inflation.
Tax Deductibility: generally, contributions are not tax-deductible for individuals.
Employer Incentives: Employers can contribute up to $2,500 annually toward that $5,000 cap. Crucially, the employer receives a deduction for this contribution, and it is not treated as taxable income for the employee—a significant perk for business owners planning compensation packages.
Safeguards and Record-Keeping: Because contributions can come from diverse sources (grandparents, employers, etc.), robust safeguards are required to prevent exceeding the $5,000 annual limit. The system utilizes centralized record-keeping to monitor contributions in real-time. Contributors will likely need to register planned contributions or check current levels to avoid over-funding. Automated alerts for account holders will help prevent unsolicited over-contributions, ensuring the integrity of the cap is maintained without administrative headaches.
2. Qualified Class Contributions
The framework also allows charitable organizations and government entities (states, tribes, localities) to contribute. However, these entities must designate a "qualified class" of beneficiaries—such as all children born in a specific year or geographic area—rather than selecting individual accounts.
Example: Michael and Susan Dell, through the Michael & Susan Dell Foundation, have pledged $6.25 billion to seed Trump Accounts. They are providing $250 for children aged 10 or under born before Jan. 1, 2025. These funds will cover 25 million children in ZIP codes with a median income of $150,000 or less.
The $1,000 Government Seed Contribution
The headline feature for new parents is the federal government's one-time $1,000 contribution. This seed money provides an immediate financial jumpstart. However, it applies to a specific cohort:
Birth Date Range: The child must be born on or after January 1, 2025, and before January 1, 2029.
Citizenship: The child must be a U.S. citizen with a valid Social Security number.
Election Requirement: A parent or guardian must explicitly elect to open the account.
Nature of Contribution: This is a one-time initial deposit, not a recurring payment. Importantly, it does not count toward the $5,000 annual private contribution limit.
Tax Treatment: While it grows tax-deferred, this $1,000 seed amount is considered pre-tax money. It will be taxed as ordinary income when withdrawn after age 18.
Children born outside this four-year window (e.g., before 2025) can still have a Trump Account and receive employer or charitable contributions, but they are ineligible for the $1,000 federal grant.
Investment Strategy
To ensure transparency and lower risk for novice investors, Trump Accounts have specific guardrails. Funds must be invested in broad U.S. equity index funds. These funds are prohibited from using leverage and must charge minimal fees. The goal is to capture the long-term growth of the U.S. economy without the complexity of stock picking.
Tax Implications and Distributions
For our clients focused on tax planning, the nuance here is critical. The account is a hybrid: contributions are non-deductible (like a Roth IRA), but earnings grow tax-deferred (like a Traditional IRA).
Distributions Before Age 18
Generally, funds are locked until the beneficiary turns 18. This ensures the capital is preserved for adulthood. In the tragic event of a beneficiary's death, funds can be transferred to their estate or a designated survivor.
Distributions After Age 18
Once the child reaches adulthood, withdrawals are treated as follows:
After-tax contributions (money put in by parents/family) can be withdrawn tax-free, as taxes were already paid on these funds.
Pre-tax amounts (investment earnings, the $1,000 government seed, and employer/charity contributions) are taxed as ordinary income.
Penalties: A 10% early withdrawal penalty applies to taxable distributions taken before age 59½. However, there are significant exceptions.
Exceptions to the 10% Penalty
While the pre-tax portion remains subject to income tax, the 10% penalty is waived for specific "qualified expenses" once the child is 18:
Higher Education: Tuition, books, and fees.
First-Time Home Purchase: Up to $10,000 for a down payment.
Birth or Adoption: Up to $5,000 for related expenses.
Disability: Expenses related to the beneficiary’s disability.
Hardships: Certain scenarios involving disaster recovery or terminal illness.
Account Management and How to File
Opening these accounts requires proactive filing. Guardians must use IRS Form 4547, Trump Account Election(s). Alternatively, an online application will eventually be available at trumpaccounts.gov.
Key Timeline:
Form 4547 can be filed with your 2025 tax return.
The online tool is expected to launch in mid-2026.
Accounts cannot begin accepting contributions until July 4, 2026.
While accounts are initially held with a Treasury agent, they can be transferred to a preferred brokerage later. This portability allows you to consolidate your family's finances under one roof.
IMPORTANT FILING NOTE If you have children under 18, you must file Form 4547 with your tax return to elect a Trump Account. The form accommodates two children per page, and you may file multiple forms. It requires the parent/guardian's SSN and the child's SSN, DOB, and address. Most importantly: You must check the specific box on the form to claim the $1,000 government contribution for eligible children born between Jan 1, 2025, and Jan 1, 2029. |
At Adkin CPA, we pride ourselves on building long-lasting relationships and ensuring there are no surprises at tax time. If you need assistance filing Form 4547 or planning your family's contribution strategy, please contact our Chapel Hill office.