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Your Money in 20
We use our experience as financial planners to help guide you through life's most important financial decisions (and we try to do it in 20 minutes or less).
Your Money in 20
Ep. 44: Trump Accounts: $1,000 Today, What About Tomorrow?
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In this episode, Vic Colella, CFP®, CDFA®, and Alex Richani, CFP®, take a closer look at Trump Accounts, a new savings option for children. We walk through how the accounts work, who may be eligible for the free money that's making headlines, and some important considerations to keep in mind before contributing additional dollars. We also discuss how Trump Accounts stack up against 529 plans and UTMA accounts and why your goals should ultimately guide where you save.
If you have suggestions for episode topics or would like to give us feedback, we would love to hear from you! Please email us at podcast@woodwardadvisors.com.
Hello, everyone, and welcome to another episode of Your Money and Twenty, a podcast by your friends here at Woodward Financial Advisors. I'm Victor Kellella, certified financial planner and an advisor here at Woodward. I'm joined by my colleague Alex Rashani. Hi, Alex. Hey, Vic. Glad to be here, as always. Yep. Alex, same here. And Alex is also a certified financial planner and advisor here at Woodward. And we are here today to talk about something new under the sun in the financial planning world, which doesn't happen all the time. And they are the, at least in the last month or two, often talked about Trump accounts. So before we dive in, I'm going to give you our disclaimer, which is that none of this is meant to be advice for your specific situation. So we're going to talk about things that relate to taxes, investments, maybe even a state or law or legal-related matters. None of that is advice for you. If you need tax advice, go to your tax professional. If you need investment advice, go to your advisor. If you don't have one, there are a few here at Woodward Financial Advisors who'd be glad to talk to you. Um so with that, Alex, what's a Trump account?
SPEAKER_01Yeah, that's a great question. Uh and it's as you said, it's new to us, it but it's this new type of account that came into fruition under the OBBA, the OB3 Act. Uh, and basically it allows you to put money aside for your child for their retirement. So getting a massive head start on future expenses for when they're, you know, uh maybe where you are today.
SPEAKER_00Yeah, yeah. And and you know, there's been a lot of marketing of these accounts as the solve to all future problems. Uh, you know, the but we're here to hopefully separate some of the what it is and what it isn't. There really is free money available. I I mean that's if there were a headline for this podcast, it'd be claim your free money now. Uh so we'll talk about what what it takes to qualify for some free money from the government. Usually it goes the other direction. Um so I think we'll start just by saying, all right, they became available in July on July 4th of 2026 in the most patriotic way possible. Uh we'll start first about how to sign up. We'll talk about the free money offers that have gotten so much headlines, and rightfully so. And then we'll start to give you some context for how should you think about Trump accounts in the broader context of financial planning? Why would I open one? Why would I put money inside these accounts, etc.? So, first let's start with how to sign up and talking about the free money stuff.
SPEAKER_01Alex, why don't you start? Absolutely. Yeah. So the process is pretty streamlined, actually. There's a uh Trump account app. You can go online, use your favorite search engine to look up Trump Trump accounts, and you'll go to a web page that basically walks you through the whole process. And that'll be paired with a an IRS form. Uh it's 4547. That basically is how you will establish the account uh through the Trump Account app. That is the initial setup. It'll be if you work with Schwab or Fidelity or wherever, all of these custodians are working towards getting the accounts on their platform, but for the time being, it's all through the Trump Account app uh and basically a pretty streamlined process.
SPEAKER_00Yeah, and for a government website, it's pretty slick. I mean, and this is completely subjective, but it the the user experience is actually quite easy. They've simplified it as much as possible, uh, which is commendable since not all government websites look that way. If you've ever been to irs.gov, good luck. It's not the same. Um, so yeah, the website's easy. There's of course an app, and what I've heard from folks and clients who have opened these for either themselves or or for somebody else, is that as soon as you verify your email address, the account becomes active. And if you're gonna take advantage of some of the free money offers, which we'll talk about momentarily, it it happens quite quickly, uh, which is again a bit surprising uh given the context of uh a new account from the government. So let's talk about the free money offers.
SPEAKER_01Absolutely. There's a huge headline out there. This is probably what you're seeing grab you. It's a thousand dollars free, right? If your your kid is born between January 1st, 2025 and December 31st of 2028 in that three-year window, there's a thousand dollars uh that the federal government is going to pay to you into that account. Basically no strings attached. You need a social security number, and uh you can apply for it, and it is set aside, carved out in the budget for your child. Uh there are some other funds. Uh, the the large one that we're seeing, it's uh $6.25 billion set aside by the Dells. Um we're working on a Dell computer, the same one and the same. Uh, and that is to give some children who were born before that January 1st, 2025 date an opportunity to get some free money as well, but it is constrained in different ways. So it's up to $250, or excuse me, it is $250 if you qualify. And the child just needs to be 10 and under, uh, which would have them born before January of 2025, and being a qualifying zip code that basically the median household income is less than $150,000. Uh, and that's eligible for the first $250 million applicants. Where we are in that process is unclear, but uh but it seems to be open still, and we uh again, the website's pretty slick to go in and and check if you qualify, just typing in your zip code and uh how old your child is.
SPEAKER_00Yeah, and and we're gonna talk planning strategy and how what happens when money goes in and when money comes out. But before we do any of that, if you have a child who is 10 and under, especially if you have a child who is born from January 5th, 2025 until the present, all the way through December 31st of 2028, you should go online and create a Trump account today, immediately, because there's free money that you don't have to qualify based on your income. You do need to have a social security number. I'm not sure about a tax ID number for naturalized citizens or anything like that. But whatever you do after that point, you're a thousand dollars ahead, so or two hundred and fifty, depending on if you get access to some of those Dell funds. So it is truly that simple. All it will cost you is a little bit of time. Uh it's well-paid time. So, so we'll talk about a lot more stuff here in a moment. But if you have a child less than 10, you probably should go to the internet and type in Trump accounts and open, you know, and open an app and apply. Um, it is that simple. You're probably gonna get some free money. Make sense. 100%. So if you want credit for giving free money to your friends who have kids who are less than 10, send them this podcast and you will get some amount of the credit for giving them free money.
SPEAKER_01Social currency, maybe a pie is coming your way. Yeah, yeah. I don't know how this is paid to you as the referrer.
SPEAKER_00Yeah, yeah, yeah. Yeah, uh you know, storing up favors for some future day, who knows? Um, so with that said, how do these accounts actually work, Alex? I mean, I know they've got Trump's name on them and they're very patriotic in nature and there's free money at hand, but that's all we've covered so far. So, how do they actually work?
SPEAKER_01Yeah, so uh as we said earlier, they are retirement accounts for children, but they strip away some of the requirements that requ retirement accounts often come with, such as the requirement for earned income. Uh so if your child is two, they probably aren't holding down a job. Doesn't matter in this case. It would for a traditional IRA or Roth IRA, uh, 401k, any of those types of accounts.
SPEAKER_00Yeah, we very often have clients who will say, Hey, I want to start funding a Roth IRA, because we we preach how good Roth IRAs are in many, in many instances. And say, I'm gonna start stashing away funds for my child in a Roth IRA. Our answer has been you can't, unless they have some amount of, like, let's say they have a summer job, they make $1,000. Well, then you could put up to $1,000 into that account. Um, but the door has been closed, certainly for kids who are younger than 15 or 16. Um, that door's open now.
SPEAKER_01My my favorite example is if they're a Gerber baby. I don't know if those exist any longer. I think the Gerber baby is already gone.
SPEAKER_00But uh child models, yeah. Yeah, you may still have a chance at the Roth IRA right away. But um the the Trump accounts available to you as well, child models out there.
SPEAKER_01Yes. And so your contribution limits differ. They're up to $5,000 per year. That'll start getting cost of living adjustments after 2027. And uh basically whatever you put in that, whether it's the thousand, the 250, or you add more on top of that, is functionally set aside, uh, unavailable to you until your child turns 18. At which point that child converts it to a traditional IRA. It's subject to all the same rules as if uh they had opened it as a traditional IRA at the beginning. Uh that has some unique planning opportunities.
SPEAKER_00Yeah. Uh let me start with what it isn't, though. Because some of the marketing around these accounts, again, has been, you know, marketing. It is not a college saving vehicle. There are some exceptions on how you can get funds out of an IRA for college, but it is not a college saving vehicle. It is not going to be something that is a good place to pull funds from for your first house. It gets converted to a retirement account, meaning when you take the funds out, those funds will be subject to income tax for your child and a penalty if they aren't of the age where they're able to take funds without penalty, which is in uh which is 59 and a half. So that is the it's important to say it's not it's not a 529 in different terms where you get free money. It's not a 529, it's not a uh UTMA, which we'll talk about in a moment.
SPEAKER_01Yeah, absolutely. Everybody who has uh spoken to us before hopefully recognizes that we're very goal-oriented. And so think of it as defining your goal will help inform where to put the next dollar, right? Uh, whether it be a UTMA, a 529, a Trump account, um, any of those various uh options available to you. Uh so yeah, so that's essentially how it works. And at that point, the Trump account at 18, the Trump account's gone, and you you have these planning opportunities with the funds. Most people are probably thinking, well, it becomes a retirement account, it's pre-tax, uh, we'll go ahead and let it grow, take it out when they turn 65 or 59 and a half or whatever age that uh you know they want to access the funds. But uh a unique planning opportunity is while your child is 18 and probably not raking in the income to consider Roth conversions.
SPEAKER_00Yeah. Yeah, and a Roth conversion, for those who don't know, it it just means you're choosing to pay the taxes on the IRA, which is pre-taxed dollars, and then nobody ever pays tax ever again on those funds. So you just have to have a few bucks to pay the taxes. Um, depending on the size of the Trump account, that could be a lot or a little, but um you kind of found a backdoor into the Roth account without earned income. That's what it's sort of like a backdoor version.
SPEAKER_01Yeah, so very unique opportunity there that we've not really had access to in the past, which is pretty cool. Uh we've talked about some of the other ones 529, U2 May, uh saving for your own retirement, right? That's still on the table as an option for you, I suppose. Um, you know, what would inform this? Uh to us, it's all about the objective that you have. So this five, this uh excuse me, this Trump account, it is designed for retirement. And so you would have to consider contributing additional dollars, you'd have to say, well, my goal is to set my child up or the child in my life up for retirement success, to get a head start on that objective. The other accounts, they do a better job at what they're designed for, right? The 529 account, that is the college savings vehicle. You can put a lot more into it, you can take a lot more out of it without subjecting yourself to taxes and penalties. It is a better account type for the goal of paying for college.
SPEAKER_00And and in some states, you get a deduction on the way in at the state level. That's not at the federal level, but at in some states that exists for 529. It's just worth mentioning.
SPEAKER_01Yeah, absolutely. The uh UTMA account, uniform transfers to minor account, custodian account, you GMA, they're all slight variations or just different uh terminology for the same thing. Uh, it's basically an after-tax account that can be used for any purpose. You set it up as the uh basically the um the trustee on the UTMA for your child's benefit, they could use it for anything, right? So if you're thinking, I just want flexibility, I just want when they turn 18 or 21 or uh you know, depending on the state, for them to just have access to a pile of cash or pile of investments to do what they wish, it's gonna be probably a better account for you because of the flexibility in accessing the funds.
SPEAKER_00Yeah, and like all things, to get that flexibility, you have to give something up. And what you give up is the tax shelter. So for Trump accounts, if your investments throw off dividends and interest or grow via capital gains, you don't have to pay tax on those funds until the money comes out the other end. On the UTMA or UGMA, depending, you do you pay tax every year on the growth or at least some part of the growth. We won't go into that now, but uh, you're paying tax as you go. Um, and then you're paying a little less tax on the way out, but still uh you don't get the tax shelter. 529, same thing, you get that tax shelter. So um, as long as you use the funds for qualifying education expenses. So, with all things, there's balance. If you get something, you have to give something up.
SPEAKER_01Um, yeah, go ahead. And the last thing I want to mention is don't get so obsessed at looking into the future for your kids that you forget about yourself. Right. So we always say pay yourself first. Usually it's in the context of don't spend your money um just as as it comes in, budget, put money towards retirement. Uh, but truly in this case, pay yourself first. Make sure that you're on the the right track for your own retirement and your own future needs. Um, if it's hard to quantify that and you need a partner in that process, we're here. We we'd love to work with you and exploring that. But make sure that you're on the right track before um helping others. It's the plane analogy, right? Put your own mask on before helping others. Do that here.
SPEAKER_00I know that's a tough sell on airplanes for people too, but uh yeah, financial planning is the same way in our view. Uh, Alex, for the person who says that all sounds too good to be true, there has to be a catch. I think there is one. Yeah, and I think it's a diversification catch. By law, these Trump accounts have to be invested in US securities. And and it's actually a limited list, so it's basically low-cost index funds that are like like the SPY or sort of a S P 500 tracking or similar. Now, the US market's been great. Our clients all have a substantial amount of U.S. stocks in their portfolio, but diversification is a massive part of our philosophy here at Woodward Financial Advisors based on many, many, many years of academic research saying it makes sense for it to be. And in these accounts, you can't have that diversification. So if you're saving money in other places for your child, uh you're just gonna have to do your diversification elsewhere. It's not like it's in five companies, individual companies, so there's some amount of diversification, but it's mostly large cap, large companies in the United States, which leaves a massive part of the global market for stocks, let alone bonds, uh excluded from your options. So it's a factor. Take the free money still. We're not saying uh, you know, for the sake of diversification, abandon your thousand dollars, but um, it is something to know, uh at least keep in mind. Uh Alex, we're close on time. There are a couple of things that I want to make sure to mention that are sort of actively developing that we know are going to be part of these accounts in the future, but they're just young. What are those things?
SPEAKER_01Yeah, so uh this is coming, right? That this account, you first started being able to fund it in July of this year, July 4th. Uh so a lot left to be figured out. One of which is how these work with employers, right? How employers might be able to set funds aside, uh, how the government is setting funds aside, right? Um will there be another round of these uh these initial seed monies? Possibly. It's it's all set up to allow for that kind of future flexibility. Um, there are some defined parameters on the uh employer side. So uh up to 200, excuse me, $2,500 per employee per year can be contributed from your benefits plan at your employer to these accounts. So there's an avenue. It's whether your company has yet set that up. Yeah. Uh probably unlikely, unless you're one of these uh really early adopter uh big companies, but it could be coming. So pay attention when it comes to open enrollment, uh, when it comes to your employee benefits meetings, because there might be some more free money on the table that you need to elect.
SPEAKER_00Yeah, good call out. Well, this has been our initial primer on Trump accounts. Uh, we hope it's been helpful. I'm sure we'll we'll be talking about these much more in the coming years as we figure out how they fit uh and how they continue to develop in terms of options for employers and things. But um thanks, Alex. Really appreciate your time and uh always happy to have you on the podcast. Thanks, Vic. Had fun. Thank you for listening to another episode of Your Money and Twenty, the podcast by your friends here at Woodward Financial Advisors. We hope you enjoyed it. Now, if you'd like to continue the conversation, you could find us on the web at woodward advisors.com and as a firm on both Facebook and LinkedIn. There's a link to those pages at the bottom of our website. You can also find us all as individuals on both Twitter and LinkedIn. Now we love receiving listeners suggested topics. So if you have a topic you'd like to hear more about, please hit the Let's Talk link at the top of our website and submit a message with podcasts in the subject line. Thanks again for listening and talk to you next time.