Whenever a new tax-advantaged account is introduced, the natural temptation is to ask whether families should begin funding it immediately. With Trump Accounts, however, the more important question is not whether they are attractive in isolation. It is where they fit within a broader strategy for a child’s education, flexibility and long-term financial independence.
Trump Accounts are designed to provide children with an early start in the markets. The child owns the account, an adult manages it until age 18, and the assets are generally invested in low cost funds tied to broad U.S. stock indexes. Contributions are limited to $5,000 annually, including up to $2,500 that may be contributed by an employer, for an employee or an employee’s dependent.
An Order of Accounts
There is a general order to think about, before funding these new accounts. For most families a 529 Plan remains the logical starting point, when education is the primary objective. When a child has legitimately earned income, a custodial Roth IRA may offer an even more powerful long-term opportunity, through the tax free growth on the child’s side.
For families seeking greater flexibility, a UTMA or UGMA account can still play an important role. These accounts are not confined to education or retirement, although parents must be comfortable with the child’s eventually receiving direct control of the assets.
That places the Trump Account in a potentially valuable fourth position, as a supplemental long-term planning vehicle. Because the account generally transitions into a traditional IRA-style structure after age 18, it may be better suited to building future retirement assets than many other goals.
Some Powerful Planning Opportunities
Using the new Trump Account may come with some future planning opportunities, as well. Family contributions may create basis in the account, potentially opening the door to future Roth conversion planning, while the child is still in a relatively low tax bracket. For business-owner families, the account may also complement an established strategy of legitimately employing children. A child could earn wages, fund a Roth IRA and potentially receive an employer contribution to a Trump Account.
The larger lesson is that account selection should never replace planning. The best strategy will not be the one that simply uses the newest vehicle. It will be the one that coordinates education funding, earned income opportunities, tax flexibility and long-term compounding around the family’s actual goals.
Start planning now for your child’s financial future. Reach out to Anderson Financial Strategies: andersonfinancialstrategies.com or 937-610-9388.
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