530a ("Trump") Accounts

[kork13]

I learned something today and thought I'd share.

Many/most of you have probably heard about the "Trump Accounts", or officially, 530a accounts ... they're managed by the IRS, invest exclusively in low-cost (<0.1% ER) and basically operate the same as a custodial traditional IRA for children. I knew that they created them & that they were available for newborns, and would also come with a $1,000 kickstarter from the federal government (a la you & me & everyone else's tax money). What I *didn't* realize is that you can actually establish the accounts for ANY minor child under 18. The only difference is that their accounts don't receive the $1,000 kicker.

Politics aside, this is an outstanding opportunity for anyone with kids. Although I already have very healthy UTMA accounts for each of them, I just did the paperwork to also open these accounts for each of my children. I'll be able to add $5k/yr to those accounts, and with my wife being pregnant with DD4 (due in early December ... not sure if I've mentioned that here yet), I'll be able to create one for her later on as well. The growth on that money will be phenomenal, given that it'll have many decades to grow & double -- $5k today becomes <$150k in 50 years! The initial plan will be to max it every year for them, and as each of them approaches 18y/o & they're able to roll it over into a proper IRA account, we can do rollovers to Roth IRAs since their incomes will presumably be very low & the taxes will be minimal at that point.

Has anyone else created the accounts for your kids? I know the political & economics philosophy are fraught with arguments, but one thing that's undeniable is the benefit that this will provide to kids in their future. I'm really happy to have this opportunity to help them for the long term.

[bjl584]

I don't have kids, but this seems like a wonderful way to get a head start at finances.
If these existed when I was born, I could have theoretically been a millionaire by the time I graduated high school

[kork13]

That's the goal ... By my back-of-napkin math, $5k/yr for 18 years @ 7% returns = ~$160k (ish) ... Then if you can roll that into a Roth IRA when they turn 18 to grow tax-free for life??? That is literally multi-millionaire territory by their 60s, even without ever adding a dime after graduating high school. Incredible opportunity.

The process was shockingly fast & easy (especially for the IRS) ... from start to finish (including adding funds), it took maybe 40 minutes of actual effort, plus 4-5 hours waiting for the online forms to process. I hope these things ultimately work out as intended.

The only downside: I wasn't planning for making $20k of investment contributions for my kids over the next 4.5 months! I've had to shut down some of my auto-transaction streams going into our savings & taxable investments in order to cover it all. But after the new year, I can dial them back to just $100/week/kid, which will be easier to absorb in the budget.

One question I haven't figured out yet that will require more research: Do our contributions to these accounts count against our annual gift limits for each child? Even between 529, UTMA, and 530A, we don't even come close to the $19k/yr limit (maybe around $9k right now?) ... but it could eventually become a minor problem to deal with if our annual "gifts" to the kids start climbing too much.

[myrdale]

I thought they were a great idea other than the fact they were only available for children born after xx/xx/xxxx. Knowing they are available for all ages under 18 is HUGE news. I guarantee 99% of the population is as clueless as I was.

[riverwed070707]

I looked into this thinking I'd open one for my 17yo just for the $1k incentive. Unfortunately that's only for newborns so we opted to skip it. Didn't make much sense for a 1 year investment

[LivingAlmostLarge]

I'm torn because you forget if you convert at 18 they are subject to the kiddie tax which i guess is fine for you or maybe not depending on where you fall on income for your retirement.

[kork13]

I'm torn because you forget if you convert at 18 they are subject to the kiddie tax which i guess is fine for you or maybe not depending on where you fall on income for your retirement.

perhaps, but there's not a specific timeline to convert it -- it's basically just a Trad.IRA, so we could delay the conversion until they're totally on their own. That's all future-me/-us problems.

[LivingAlmostLarge]

i've been thinking about that a lot. Considering the options. I thought it was a no brainer but now i'm not so sure. It was supposed to be tax free coming out for education etc. But they changed it. You have to track basis carefully. My fear is they are dumb enough to change the rules again

[Like2Plan]

Kork
Free money, then yes.

https://www.wsj.com/opinion/the-trou...bshare_permali nk

Your contributions do count towards the annual gift tax exclusion. At first, they were saying since this is a gift of future interest you would be required to fill our a gift tax form even if you didn't exceed the annual exclusion. Recently, the IRS has issued guidance that it is considered a completed transfer and therefore a gift tax return is not necessary unless you exceed the annual exclusion.

https://www.irs.gov/newsroom/understanding-trump-accounts-working-families-tax-cuts-youtube-video-text-script

https://www.groom.com/resources/gift-tax-filing-relief-for-trump-accounts-102n7uy/

The other heartburn I have is I have read conflicting information. One source has said that even if you make an after tax contribution, it is taxed again when it is taken out of the account. I also have been reading (similar to LAL above) that you have to track your basis (contributions). Maybe this is just early in the process and they will track the basis for you? There have also been some suggestions that maybe employers could offer a pretax contribution into these funds as an employee benefit. Having accounts that have pre-tax and after tax money in them does complicate filling out annual tax forms because you must track your basis (if that is what they are doing with these accounts)

But, one other thing that bothers me is that presumably (after 18 years) there will be some growth in these accounts. The gains when withdrawn (assuming no penalties) would be taxed as ordinary income. If you were to keep the same stocks in your own name (ie the parents name), you could transfer the stocks to the children (after the kiddie tax years). The stocks would have the original basis (and the "contribution" portion would not be taxed). When the kids decided to cash in the stocks--the kids would be taxed only on the gains at their tax rate and on the more favorable capital gains tax rates.

[kork13]

From what I can tell, it's basically formed like a non-deductible Trad IRA. So the tax benefit isn't really anything. Where I think the win comes in is the fact that it can later be rolled to a normal traditional or Roth IRA. Especially knowing that most 18y/o's don't have a very significant (if any) income, the taxes on the rollover to a Roth IRA would be fairly low, especially if spaced out across a few years (like while in college). That opportunity to roll almost 2 decades of contributions & growth into a Roth IRA for someone just graduating high school .... THAT is where I think the hive benefit comes from. It'll likely grow into multiple millions by the time they actually get to retirement age.

[Like2Plan]

From what I can tell, it's basically formed like a non-deductible Trad IRA. So the tax benefit isn't really anything. Where I think the win comes in is the fact that it can later be rolled to a normal traditional or Roth IRA. Especially knowing that most 18y/o's don't have a very significant (if any) income, the taxes on the rollover to a Roth IRA would be fairly low, especially if spaced out across a few years (like while in college). That opportunity to roll almost 2 decades of contributions & growth into a Roth IRA for someone just graduating high school .... THAT is where I think the hive benefit comes from. It'll likely grow into multiple millions by the time they actually get to retirement age.

Kork,
I would recommend doing some tax modeling under different scenarios. I am willing to stipulate that the current tax law could change by the time your kids are 18, but here are a couple of considerations.
I would compare paying taxes on the conversion at ordinary tax rate vs taxes paid on capital gains (per the example above).

Some considerations.
Under current tax law, if your children are attending full time college, they are still going to be subject to kiddie taxes until age 24. https://www.fidelity.com/learning-ce...nce/kiddie-tax

I don't know if the Trump accounts will be treated differently (vs 529 account conversions). Will there be a limit on how much you can convert? (Would you be able to convert both type of accounts during the same tax year?)
Will the pro rata rule apply?

Assuming this works just like a non-deductible trad IRA--In order to track the (after tax) basis, you would have to fill out a form 8606 each year for each child. (It would certainly bother me to pay taxes twice--18 years X $5,000 =$90,000 of (after tax) contributions.)

Here is a link to the Financial Buff (including the conversion) on how this is reported on taxes. (The Trump accounts of course would cover a longer period of time before the conversion part would begin..

https://thefinancebuff.com/how-to-report-backdoor-roth-in-turbotax.html

But, you might end up having to give your kids a lot of help doing their taxes after they are on their own.

[LivingAlmostLarge]

For me I think the deferred taxes until 24 is interesting but my kids might be able to earn a decent wage, but they could convert the $10k and $20k they have invested into roth so it probably is worth it. Especially if I help cover the taxes.