Full details on these new accounts are here, but it appears they are usually inferior to other options such as 529s, 2503(c) trusts, and custodial accounts when funded by parents (or grandparents, etc.). However, they may make sense (individual facts and circumstances need to be considered) for:
- The free $1,000 from the government for a child born in 2025-2028.
- A free $1,000 from an employer (link).
- Employee funding through a Section 125 (cafeteria) plan – see more below.
- A child who is close to age 18 – see more below.
Notes on that third option above:
- The plan cannot discriminate in favor of highly compensated employees.
- The $2,500 is total per employee, so if an employee has two children that would be just $1,250 each.
- There would be no basis in the account.
Assume a simple example of a 1099 independent contractor with a child under 18, no employees. The “employer” (the independent contractor themselves) can put $2,500 each year in the child’s Trump account. At 18 (ish, again see the full details here) the child could (and probably should for simplicity if nothing else) roll the balance to a traditional IRA. Then:
- A portion could be converted to a Roth IRA each year (keeping in mind the kiddie tax) while the child has no unearned income (and presumably trivial earned income), or
- The funds used for qualified education expenses or some other IRA distribution exception to the 10% penalty for early withdrawals.
Notes on the fourth option above (h/t Jason Lina for this one):
For a child turning 17 in a given year, a parent could presumably make a $5,000 contribution to the Trump account on December 31st of that year and then on January 1st, convert that $5,000 to a Roth IRA. This wouldn’t preclude any other Roth IRA contributions from any earned income and, if the conversion is done immediately, there shouldn’t be any tax ramifications. Essentially, it is equivalent to a $5,000 backdoor Roth contribution for the child without the need for earned income. It might even be worth contributing somewhat prior to 17 and taking the tax hit (if any) on the conversion to get the funds into a Roth.
Finally, note that if a parent, etc. makes a contribution to their child’s Trump account (not through a business), it appears that a form 709 (gift tax return) would have to be filed since, given the severe restrictions on the Trump account, that gift cannot use the gift of a present interest exception. Thus, the gift will use some of the donee’s lifetime estate and gift tax exemption. The work-around for this is for the parent to gift to the child and then have the child fund their own Trump account.