Trump Accounts and How To Optimize Them

If you're a business owner looking to give your child a head start with their retirement, book a call with Directed IRA to learn more about the Kid's Roth!: https://directedira.com/appointment/ 

Open a Trump Account here: https://trumpaccounts.gov/

In this episode of the Directed IRA Podcast, Mat Sorensen and Mark J. Kohler break down one of the newest retirement savings vehicles available to families: the Trump Account. They explain who qualifies, how the account works, and why they believe it has the potential to become a powerful long-term wealth-building tool for children. The discussion goes beyond the basics, covering tax strategies, Roth conversion opportunities, employer contribution rules, and how parents can use these accounts to teach their children the importance of investing from an early age.

Main Topics Covered

• What a Trump Account is and who is eligible to open one.
• How the government's $1,000 contribution works for qualifying children.
• Annual contribution limits and who can contribute to the account.
• Why starting to invest early can lead to significant long-term growth through compounding.
• The tax treatment of Trump Accounts and why Roth conversions can dramatically improve long-term outcomes.
• How to navigate the "kiddie tax" and strategies for minimizing taxes during Roth conversions.
• Employer contribution opportunities and how business owners can potentially create tax deductions while funding a child's account.
• How Trump Accounts compare to the Kids Roth IRA strategy and when each may make sense.
• Why investment flexibility after age 18 can create even greater wealth-building opportunities through self-directed IRAs.
• The importance of teaching children about investing so they understand how to preserve and grow their retirement savings for the future.

Whether you're a parent, grandparent, or business owner, this episode provides practical strategies for helping the next generation build wealth while taking advantage of new tax-advantaged opportunities.

For questions or to learn more about this episode's topic, book a call with an IRA specialist here: https://directedira.com/appointment/

Interested in learning more about alternative investments? Join us this year at the Alternative Asset Summit October 22 & 23, where you'll hear from industry experts and connect with like-minded investors exploring new ways to build wealth: https://altassetsummit.com/

Other:

Mat Sorensen: https://matsorensen.com

Mark J. Kohler: https://markjkohler.com/ 

KKOS: https://kkoslawyers.com

Main Street Business https://mainstreetbusiness.com

Transcript

Welcome And The Trump Account

SPEAKER_00 0:08

Welcome everyone to the Directed IRA podcast. This is Matt Sornson, joined by the incredible Mark J. Kohler, attorney, CPA. Extraordinaire. I don't know. You don't need to throw in another accolade there. Author.

SPEAKER_01 0:22

There you go.

SPEAKER_00 0:23

Developer.

SPEAKER_01 0:23

Thank you so much.

SPEAKER_00 0:24

Rancher.

SPEAKER_01 0:26

Well, I I appreciate that. You can call me tomorrow morning at 8 a.m. and repeat that and you know give me a chance to do that.

SPEAKER_00 0:32

Yeah, the extraordinary part. Um well, we are excited to be talking about something new in the retirement account and tax advantage landscape. There is a new kit on the block. It is called the Trump Account. You're familiar with 401ks and IRAs and Roth IRAs and HSAs. I'm telling you, there's a new account that's in the lexicon of all these other tax advantage accounts. It's called the Trump Account. You need to know what it is because it's going to be there, and you should be thinking about doing it for your kids. You love the Trump account, Mark?

SPEAKER_01 1:06

What do you think about it? I love them. And I'm doing math here on the uh the possibilities because the the trick is always starting early with saving. Yeah. And this Trump account is such a great opportunity to talk about young people starting to save earlier in life and what that snowball effect can be with the money. And then you put on top of it some of the tax strategies we're

Who Can Open One

SPEAKER_01 1:40

going to talk about today. It is really phenomenal. So I've got some math here I want to share too that's just really, I think, going to be fun.

SPEAKER_00 1:48

Yeah, so let's talk about what this is. This is not for you. This is for your kids, or maybe your grandkids, or the neighbor kid. This is a Trump account is established for anyone from age zero to 17. Once you hit age 18, this Trump account turns into a traditional IRA. We'll come back to that here. There's some strategies there. But from 0 to 17, you can put $5,000 a year per child that's a U.S. citizen with a Social Security number, you can put $5,000 a year total they can have in their account. Now these Trump accounts get invested in the stock market. Sadly, you cannot self-direct them, but they're invested in index funds like the S P 500. So they're invested and this money is going to grow. But this is $5,000 every year you can put in. There's some free money, we'll talk about the government's giving as well. But what I want to just make sure everybody understands is this isn't for you. This is for your kids or your grandkids. And like Mark said, it's about starting early, giving them a head start, and letting the compounding start doing all the work. And I've I ran the numbers about putting 10 years of contributions in, um, or sorry, 12 years of contributions, putting 60 grand in. Let's say you had a five-year-old, you do it for 12 years until they hit 17, and how that account turns into $8 million in their 60s, when they turn 65, they don't put any more money in when they're 18. It's like 8 million bucks.

SPEAKER_01 3:17

It's in the millions. And I I just think it it's incredible what the opportunities are. So let's get to the some basics first, and then we'll start doing some math and and show you guys what the possibilities are. Um does that sound all right? You want me? I'll just kind of give you some of the facts I like. Um, first, any child under age 18 can open a Trump account. That's point number one. Don't get hung up on are they born between 2025 and 2028? Anyone can have an account if they're under age 18. If they're born during this unique period of 25 to 28, then 2025 to 2028, the government's gonna put $1,000 in to that account. If you open it, you've got to take active action to go open it and fill out some forms. The government will drop $1,000 in. But anybody under age 18 can have a Trump account. And while they're under the age of 18, they can put in $5,000, the parents could put in $5,000, the uh grandparents could put in $5,000. Anybody can put the $5,000 in for that child. And if they're 17 years old right now, they can open that account tomorrow and put in $5,000, and it will grow tax-free with investments that are predetermined under the Trump account structure, and it

Funding Limits And Where To Open

SPEAKER_01 4:55

will grow. And then at age 18, they can make some decisions. That's my initial summary. What do you think, Matt?

SPEAKER_00 5:03

Yeah, I uh now let's let me kind of go next level on that. Yeah, there's a lot of it. Okay, all right. You're gonna open this account at trumpaccounts.gov. This is the website you do it at, and Robin Hood is the initial provider of these accounts. They're the kind of the pilot program, the Treasury Department selected. There's gonna be every other financial institution, many of them are ready at you know to launch these next. These are low-fee accounts. These are no fee accounts, the investments are low. Most of the institutions that are doing these are doing them because they want to get that kid as a customer of theirs in the future. This is kind of like customer acquisition. So now when I you put that five grand in, though, I want to make sure everybody understands this. You don't get a tax deduction. Now you've heard, as I said earlier, you put that five grand in, you go to invest it. There's no taxes on the growth, this is building up. And when your kid reaches age 18, this turns into a traditional IRA. Now, when I first heard about Trump accounts, I got to that point and I was like, that sucks.

Traditional IRA At 18

SPEAKER_00 6:05

I don't like Trump accounts. Why am I going to put five grand in, get no tax deduction, and that money is going to turn into a traditional IRA when my kid reaches age 18? They're going to then grow the account, pull it out, and the dollars are taxable. Like, why doesn't it like a Roth IRA? I don't get a tax deduction for the five grand if I put it in a Roth IRA. But how come it's a traditional IRA? However, my mind entirely changed on this when the Treasury put out regulations and confirmed that a Trump account turns into traditional IRA when the kid reaches age 18. And that traditional IRA can be converted to a Roth IRA. And when your kids 18, 19 or in their 20s, they're going to be in a low income bracket, if no income bracket, and they're going to be able to convert at little to no cost because the cost of the conversion is taking the traditional account value into your taxable income. So, bottom line there, I just want to get that early, is you do not get a deduction to put the money in. And this does turn into a traditional IRA for your kid when they hit age 18. But we can do a Roth conversion. And for that one reason, I'm a huge fan of Trump accounts. If I couldn't do that, I probably wouldn't like them. I wouldn't even be talking about them. I wouldn't have done a bunch of YouTube videos on them. But because you can convert to Roth, I'm like a huge fan.

SPEAKER_01 7:24

Now I let's talk about this deductibility. And these can seem complicated. So if I repeat myself here a little bit, I want everybody listening to realize this repetition will help you absorb how these work. And so if you're gonna, let's say your child's born in the next year or two, they're gonna have 18 years of runway. So they get $1,000 from the government and 18 years to put in five grand. Now I'm gonna uh project, I'm gonna predict that that $5,000 will be adjusted for inflation. Let's just say it stays at $5,000. That's $18 times five is $90,000. So theoretically, that kid would have a $91,000 account if there was no growth at all. Now, if you put in there a reasonable growth of 8%, I would hope these accounts would get that with the structure that the government's created with Wall Street. But if he gets 8%, around age 18, the kid's going to have approximately $190,000 to $200,000 in that account. So over the 18 years, that $91,000 of basis would have grown to $200,000. So that gain, if you will, is what would be taxable as the kid pulls it out. So it would ordinarily convert to a traditional IRA in that format. And any of the original contribution would just come out as basis. That's not taxable. But that $110,000 of gain would be taxable. Well, Matt says, not good enough for me. Let's put that on steroids. I want to convert that entire $200,000 account to a Roth IRA. And the beauty is you only pay tax on the $110,000 of interest. So you end up, that kid ends up with a $200,000 Roth IRA approximately for only tax applied to $110,000. And guess what tax bracket they're going to be in? It's going to be a pretty low tax bracket. So it in meanwhile, the kid could have been building up a Roth IRA at the same time, which Matt and I have talked about for years. The Kid Roth strategy, where parents are paying their kids for working in the business. We'll come back to that. So that's on the side. But I just wanted to kind of give you some numbers behind that snowball that's going down the hill. What would you add to there, Matt? I know there's so much to unpack.

SPEAKER_00 10:19

Yeah, I think that's a great example there. And if you think about that, when your kids 18 or in their 20s and doing that Roth conversion, that example Mark talked about, their accounts now worth 200, you put in 90K, 110 goes into taxable income for them. But if I don't do that, and you let that $200,000 account now turn into an $8 million account when they're 65, what's going to happen? Only $90,000 is basis now. And you've got millions of taxable gain coming out later to them. All right. Now they're definitely going to be in the highest brackets. So it is a very opportune time, and I love

Kitty Tax And Conversion Timing

SPEAKER_00 11:00

the strategy of converting at that young age. Now there's one wrinkle you want to make sure you're aware of, and that's the kitty tax. So if when your kid is from age 18 to 23, if they are still a dependent of yours, like they're in high school, they're going to be, or if they're in college and they're dependent of yours, the kitty tax can apply. And what that means is when they do the Roth conversion, let's take that example, let's say they convert and they take that whole $110,000 into income. They pay tax on that $110,000 based on your tax rate, not theirs. And you might be in a high tax bracket, let's say maybe you're in the 37% or the 20s, and so they're gonna assume your tax rate. So what what we like is if we can get around the kitty tax, that $110,000 goes on their tax rack bracket. They likely have no income, right? Or little income. They get a standard deduction. Maybe we can even chunk it over multiple years and keep it in a low bracket so we can get around the kitty tax where they're not your dependent, or maybe you even wait until they're 24 to do this. There could be some ways to avoid really all any taxes on the Roth conversion. Yeah, great points.

SPEAKER_01 12:10

Now, now here's another tax strategy. If we let's

Business Write-Off Contribution Strategy

SPEAKER_01 12:15

pivot now to this concept of when you put money in the Trump account, it's not a write-off. Okay, sure, that's on the face. But for many of our listeners out there that have a small business, when you employ your children, there's some other strategies to consider. First of all, in the regulations for the Trump account, a business owner can put 20 up to $2,500 into a Trump account for work performed by a kid under age 18. So it could be your child or someone else's child. So let's say I'm hiring some day laborers out on my ranch, and I've got some high school kids coming over, raking the field or pulling, picking up rocks, whatever it is, and they're working. I can pay them $2,500 up to $2,500 and put it in their Trump account and take a tax write-off. So they're trying to encourage businesses. If you hire kids under age 18, you can take a write-off and still put it directly into their Trump account. But you as parents, this is even easier because you don't have to withhold SudafudaFica or Workers Comp. And you can hire your children in your business, something we've talked about over and over again on our sister podcast, as well as this podcast, Main Street Business Podcast, if you're not a listener over there. So business owners with children, there's a way you can make this Trump account tax deductible because you may even pay the child and they put their own money into the Trump account after you've paid them. So I could make that entire $5,000 deductible. That's pretty powerful.

SPEAKER_00 13:57

Yeah, and I I like if for those of you that have kids that work in the family business, or maybe it's even the rental property, I love the kid's Roth strategy because the kid can just put that into a Roth IRA directly. You still get a tax deduction for paying them out of the business. It's and they've got earned income, so they qualify to have their own Roth IRA. Now, the Trump account, you don't have to have earned income, right? There's no earned income requirement for a Trump account. And what you're seeing with most employers, and and Mark gave a nuanced example there. I don't want to make sure, I want to make sure people don't confuse that example because let's say what what most of this is this like $2,500 employer contribution is for employees of the business, it's for their kids. So the qualification is hey, I'm an employee in the business, I have kids, the company can put the $2,500 into my kids' Trump account, and the company takes the deduction. Okay. So there's a there's a number of ways around this employer contribution, which is $2,500 that the employer can put in, take a deduction for, and that money is going into the children of employees' Trump accounts. Now that doesn't mean you can do $5,000 and $2,500 for $7,500 total, by the way. If the employer, you're doing that strategy either in your own business or you work for a company that's doing the strategy, and they put in $2,500 to one of your kids' Trump accounts, then you can put in the left, the other $2,500 left to get you up to the $5,000 max. Yeah.

SPEAKER_01 15:34

And I think that's a great point to emphasize. You can only put $5,000 in these accounts for this child under age 18 every year, right now. It's $5,000 is the max. But where that $5,000 comes from is the trick. It could come from a business that hires that kid, come from your business that hires that kid. It could come from you. It could come from the child themselves. It could come from grandparents. So if you get creative, you can make that $5,000 contribution tax deductible if you're creative and think uh intentionally about how you're going to do it.

SPEAKER_00 16:10

All right. So let's clarify this, though, for everybody that from this employer $2,500. This can work if you're a kid working at a business. Let's say you're a teenager that offers Trump accounts. This $2,500 goes into your Trump account. All right. You don't have kids yet. This is going into your Trump account. For most people, though, it's going to be the parent that works for a company. This could be your own company, by the way, where you say, hey, if you're an employee in our business, we're going to put these $2,500 into your children's Trump accounts. It's not going into yours. You don't qualify for one employee. You're 45 years old. We're putting it into your kid's Trump account if they're under, obviously they're zero to 17. So it can work either way, either if it's the kid that's working, think of the teenagers, um, or it's you, the employee, working for a company, and the company puts it into your kid's Trump account. That's a little confusing, but it can work either way.

SPEAKER_01 17:03

Yeah, great point, Matt. I

Rule Of 72 And Real Growth

SPEAKER_01 17:05

love that you bring that home. Okay, now I want to throw out another cool aspect here. Now, everybody, this requires you to know what is called the rule of 72. Now, what this rule is, many of you have heard us talk about it here on the show before, is that if you invest $100, how quickly is that $100 going to double? Well, the rule of 72 tells you that based on your rate of return, how quickly that $100 will double when you invest it. So if you take the rule of seven, the rule of 72 says you take 72 and divide it by 8%, let's assume you're going to get an 8% rate of return, then your that money, whatever amount you invest, if it gets 8% every year, it would double in approximately nine, nine and a half years. So I put in $100, I get 8%. The rule of 72 says that $100 will turn into $200 in 9.5 years. Well, that's when you hear people say, well, that Trump account's gonna be worth $4 million or $8 million or blah, all this, what people are doing is presuming the rate of return this Trump account's gonna get from that child the day they start to when they retire. Okay. So what do we think these Trump accounts are actually gonna do? I'll tell you, Matt, if they make 8% after all the expenses involved, I'll give you $100. I don't have much faith that these Trump accounts, while a child is under age 18 and controlled by the government in Wall Street, are gonna make, after all the costs, are gonna much make much more than eight to six to eight percent. But here's the strategy. Once that kid turns 18, that money is unlocked and you can roll it into a self-directed retirement account, the Roth account we've been talking about. Now, if I get a 10% return or a even a 12% or a 15% return investing in things that I understand and know, and that money is unlocked for me. So let's say that kid that had that $200,000 account now converts it to a Roth and you invest it in directed IRA. Well, you move it to directed IRA and invested in things you know better. That's when that $200,000 will double every four and a half years with a 15% return. Now it goes from 200 to 400 to 800,000 before they're even 80, before they're even 30 years old. So that money can start exponentially growing into these numbers you see online of six, eight, 10, or 12 million dollars. But it takes active, wise investing once that kid turns 18. But that's really another concept that I think is just so powerful here.

SPEAKER_00 20:19

Yeah, and they call that the zero to 17, they actually call it the growth period under all the rules, which it's gonna grow, but I don't know, I don't think that's your period of growth. I think your period of growth to be looking forward to and why we love the Trump account is once the kid reaches age 18, it's now an IRA. It's not a Trump account. Trump accounts, as they're as they sit, have a restricted investment menu, which is U.S. index funds or mutual funds on the U.S. stock market. Okay. Now they're gonna be low fee and everything, but but you're gonna have some limited investment options there. Once they're 18, this is a traditional IRA, whether you just leave it as tradition or you convert it to Roth. We love converting it to Roth. Like Mark said, you can self-direct it. That Roth IRA could buy real estate, a private fund, a small business, crypto, an individual stock, even. Like you're just you have more investment flexibility

Self-Directing And Teaching Kids

SPEAKER_00 21:10

and freedom to grow and build that Roth IRA. Now, here's one thing that's really important. I did a video on this too on YouTube. It's like the kid has the ability, it's their account at age 18. So it's not just your responsibility and job as the parent of the child to help figure out how to get money into this account and give them a head start financially. It's also your job to teach them what you're doing and what investing is and how this can compound and benefit them in the future. Because at 19, 2021, if you are not there helping them and still being their parent and still being involved in this, they could just liquidate this thing. They'll have massive taxes and penalties to do it, but they could liquidate it early because it will be their account. So there's another little step to this, which is they're gonna graduate here at 18 into More investment options, more flexibility, but they could also go the other end on this and just distribute the whole thing and blow all of your work that you did to give them a head start. So think about those things together. And my best recommendation, which is what we give to our clients and have done for years with the kids Roth IRA strategy, is teach your kids about investing. Show them the value and the importance of this, not just surprise when they're 18, you have this account. Teach them how they're investing it, let them see how this is growing and how the money is working for them. If they just let it keep rolling, it can be a huge, huge benefit to them in the future.

SPEAKER_01 22:34

Yeah. I I think that's one of the ancillary benefits of these Trump accounts, people are not talking about enough, is that it's really driving parents to have conversations about money with their kids and teach them about saving. Why are we doing this? It's shocking to me how many families don't talk about money or sex at the table. You know, like that. They just avoid those topics altogether. And that's when problems happen, obviously. And so we need to be talking to our kids about money. And this Trump account is a wonderful way to start that conversation about saving. So when they turn 18, they're a little more responsible with it. Now I have one thing to say too. Last point for me. I know there's parents out there that are like, well, this would have been great if I 15 years ago, you know, this would have been great 10 years ago or whatever. It's never too late to start with something. Something is better than nothing. And so if you have kids that are 14, 16, 17, still get involved in this process. Do the best you can to get something started in a Trump account. I think having that conversation again with your kids about saving and starting that snowball, even as small as it would be, is better than nothing. So don't be dejected or frustrated. Take advantage of what you can and and uh jump on the bandwagon. I think it'll bless your family tremendously.

Resources And Next Steps

SPEAKER_00 24:11

Yeah. Yeah, great point. Um well, thank you everybody for tuning in here. Mark and I have both shot some videos on YouTube on this. We've got some other content and resources on this. We have some uh uh uh, of course, the podcast episodes and make sure you're you're subscribed here to the podcast so you're not missing out on future episodes. And also if you're someone that's like, what are you guys talking about? Self-directing and buying real estate with an IRA or private fund or crypto. I've never heard of that. Well, welcome to the Directed IRA podcast. That's what this podcast is all about. You can go back to episode one. We're talking about all the time. You can also learn more at directedIRA.com. And if you want to get started on your self-directed journey, get over to directedIRA.com, or you can book a call with our team to talk to them. And last but not least, sorry, this is the commercial part of the show, is the Alt Asset Summit. We got this plan. It's coming up in a few months. Altassetsummit.com. Both Mark and I will be speaking there on two days. It's two days going over all the alternative assets you can invest in with your regular dollars or with your self-directed IRA dollars. We have hundreds of attendees that show up for this every year, some incredible speakers. So make sure you're signed up for that. It's in Costa Mesa, California, October 22nd, 23rd. Again, altassetsummit.com. We'd love to see you there. Thanks, everyone. See you next time.