Parents who have signed their children up for the new “Trump accounts” may wonder what the best way is to use and manage the accounts after they launch on July 4.
Amid the steady drip of information about these new accounts in recent months, what is critical to understand is that they are essentially “a form of traditional IRA available for children under the age of 18,” as noted in a Congressional Research Service report
Most Read from MarketWatch Parents can optimize the account’s utility by thinking about it as a vehicle for jump-starting their child’s tax-free retirement savings before the child is old enough to start working, which is traditionally what makes a person eligible to contribute to retirement accounts. “The Trump account is really a prefunding of a retirement account,” Bryan Strike, senior director of financial planning at Mercer Advisors, told MarketWatch. When a child turns 18, traditional IRA rules will apply to the account, including the opportunity to do Roth conversions when the child still pays no taxes or is in a low-tax bracket. This is the primary financial opportunity the accounts offer: allowing the Roth money to compound tax-free for decades and letting the account holder avoid having to take required minimum distributions in retirement.
Without the Roth conversion, the funds are taxed as income at the time of withdrawal — in other words, if left to sit for decades, they are a tax bomb. There are other ways to use the money in a the new accounts, which can be withdrawn penalty-free (but not tax-free) starting the year the child turns 18, following the rules for IRAs: for example, to fund education, to buy a first home or to pay up to $1,000 in annual emergency expenses. Still, financial experts say 529 accounts still provide more benefits for college savings than Trump accounts, and taxable brokerage accounts — which now allow kids as young as 13 to make their own trades — provide maximum flexibility, making them better for financial…