Yes, the Trump Account Belongs in your Financial Order of Operations. Here’s Where.

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2:21That's 50 % off your first year at Monarch.com with the code P-O-C-K-E-T-S. Today, we're going to be debating a question for parents and future parents. What is a Trump account and where does it fit into my financial independence plan? We'll be breaking that down with Jeremy Schneider from Personal Finance Club.

2:44Hello, hello, hello, and welcome to the BiggerPocketsMoney podcast. My name is Mindy Jensen, and with me as always is my never-afraid-to-Trump conventional-fi wisdom co-host, Scott Trench. Thanks, Mindy. I've been biding my time waiting to discuss Trump accounts with you here, and couldn't be more excited to get going today. Look at that one, huh? That was great. We'll have to retire these political jokes here. They're going to trigger people. But with so questions around these new accounts we wanted to bring on somebody who has taken a deep dive and actually opened a Trump account himself so that he can help us separate the facts from hype.

3:15And so today joining us is Jeremy Schneider from Personal Finance Club. Jeremy, welcome back to Bigger Pockets Money. I'm so glad to be back. Hey, Mindy and Scott. I love the show. Thanks for having me. Well, thank you for joining us. For anyone who may be hearing about Trump accounts for the first time, can you just explain very quickly what they are? It's basically a new tax code that lets children open up investment accounts that are controlled by their parents until they're 18. So think of it like an IRA for kids. So you can start investing for a child's retirement at birth rather than waiting until they're 18 for them to be able to open an account.

3:49Awesome. Yeah. And so I think that when we have another tax advantaged account, that needs to then fit into the order of operations that you choose for yourself as an optimal one or your best guess of what's optimal for you in the context of saving with your discretionary income, right? So here's my hypothesis about how to use the Trump account in the context of a tax-advantaged order of operations for those pursuing financial independence, right? First, you take your free money, the Trump account contribution. I had actually thought this was a match until I talked to Jeremy, and it's not a match.

4:20It's not like you have to put a thousand bucks in to get a thousand for your baby. You open the account and a thousand dollars goes in for your baby. So you take that free money. Then you take your 401k match from your employer. Then you might consider something like an employer stock purchase plan, depending on what's offered there. Then you're going to max the HSA, which for a married filing jointly household, presumably most people taking advantage of Trump accounts are many of them. That's$8 ,750. Then we're going to fully fund our 401k. That's$49 ,000,$24 ,500 each for two income earners.

4:49Then we're going to max the Roth IRA, either through a normal or a backdoor contribution. That could be up to$15 ,000 for this household,$7 ,500 each. Then we're going to fund the 529 account before we max the remainder of the Trump account because up to the amount that we're projecting to spend for college education, because I think the 529 plan is arguably better if you have a plan to spend for college education. And there may be a little bonus because it can be rolled over to a Roth IRA up to, I think,$35 ,000. Then we're going to max the Trump account after we've met those preconditions. So excluding the 529, you're talking about$72 ,750 for this married filing jointly household, contributing to other tax-advantaged accounts before they even get to these Trump accounts for one or multiple children.

5:32So in practice, I think that aside from taking the free money, very few people are going to get to these Trump accounts if they're following what a lot of people would argue are best practices in the rest of their tax-advantaged order of operations stack. So, Jeremy, how am I doing here? I agree mathematically. You're right, which is this isn't some better tax break than the other tax advantage accounts. You know, by the math, by the spreadsheet, you're right. I think, you know, the only counter argument might be, is there a reason you want to be doing this with your child? Or do you want to take birthday money that's given to your kid and put it in this account because it's really theirs and not yours?

6:07You know, then you kind of are left with a question. Okay, where does birthday money go? Is that a 529 thing? Is that a custodial agmatma? Is that a Trump account thing? But basically, yeah, you're right. That's how I'm handling it. I'm taking my$1 ,000 for my baby, my$250 for my five-year-old, and I don't plan to hyperfund this or anything just because, like you said, it's not the best tax advantage. And also, there's some weird things about having an 18-year-old with a ton of money in their name that they can control on their 18th birthday, which maybe isn't the lesson that we want to be teaching either.

6:39This is going to grow tax-deferred, right, in this account for this child up until they turn 18. Can you explain why that's important relative to just putting money in an after-tax brokerage account for them, for example? You dove right into the really great technical analysis of the whole order of operations, which is great because I'm sure many people who listen to this podcast, most of them just want to hear the details. But I think it's always important to take a step back and remember that a Trump account in any tax advantage account isn't an opportunity to invest. sometimes people say to me like, oh, if the Roth IRA max is$7 ,000, does that mean I can't invest more than$7 ,000?

7:17And the answer is no. You can always invest unlimited amount of money in a regular old brokerage account. You can go to Fidelity, Vanguard, Schwab, Robinhood, Wealthfront, whatever you want, open up a regular account and you can invest unlimited money. And it has unlimited flexibility. You can spend that on whatever you want. You can take it out whenever you want. You can put it in whenever you want. There's no limits. The only reason you would ever not do a regular brokerage account is if you're trying to get a tax benefit, if you're trying to pay less in taxes. And the trade-off you're making for that is one of flexibility.

7:47And so the conversation about all these different accounts is, am I willing to have less flexibility with my money in the hopes of paying less tax? So yeah, the after-tax brokerage account, when you put money in, you have a job, you pay income tax, you put mine into a regular brokerage account. It grows. And then when you sell something, you pay capital gains tax on it. And then as it's growing, you're also paying income tax on the dividends and any capital gains are kicked off within those years. And so you're kind of taxed three times. You're taxed on your income, you're taxed while it's growing on any dividends it kicks off, and then you're taxed on the gains at the end of capital gains.

8:21A Roth account, and this is the same for 529 accounts, you're still taxing your income, and then you put money in. But with Roth or 529, you're never taxed again. But the tradeoff there is with a Roth account, you can't take it out till you're 59 and a half years old. And with of 529, it needs to be spent on qualified educational expenses. Or like you mentioned, there's some opportunity to roll it over to a Roth IRA if the kid doesn't use it all. And so that's kind of the trade-off, which is, okay, we're going to not tax you after you put the money in, but your hands are a little bit tied. You have to use it for stuff the government wants you to use it for, i.e.

8:54retirement education. The Trump account's a little bit weird because you put after-tax money in and then it grows tax-deferred. But when you take it out, you still pay tax again, actually, instead of like the Roth benefit, which is great, you never pay tax again, you're actually paying income tax on the gains. And so the first time I heard this, I was pretty annoyed. I'm still a little bit annoyed because the traditional versus Roth debate is like, do you want to be taxed at the beginning and never again like a Roth? Or do you want to be not taxed at the beginning and only at the end, like a traditional with a Trump account, you're actually getting taxed at the beginning, income taxed, it's growing tax deferred.

9:29And then at the end, you pay income tax, not capital gains tax on the growth. You know, when you say that out loud, you're like, wait a minute, could that even be worse than a brokerage account? And it actually might be worse in very unique situations. But it turns out that that tax deferred benefit is powerful enough to override the fact that many people are going to be in higher income tax brackets than they would be in capital gains tax brackets. And so that's the whole point of this tax benefit. But, you know, actually really, for what it's worth, and we should maybe get into the politics, but like for what it's worth, I think the Trump accounts are really well implemented.

10:02I think they're really easy to use. I think they're a good idea. But I wish that tax benefit was stronger because if it was like the Roth benefit where you never pay tax again, that would be much more interesting and probably move up in your order of operations. Mindy had a great point about this when we were prepping for the show here. Mindy, can you explain the rollover concept for this and why that's so powerful with the Trump accounts? These are triple tax disadvantaged. Is that what we're going to call these? Like super tax, yay tax. But when I am putting money into a Trump account for my child, I'm paying taxes at my current tax bracket.

10:39It's growing, like you said, tax deferred. When they turn 18, that Trump account changes to a traditional IRA, which is not a taxable event. You can make it a taxable event by taking that traditional IRA and converting it to a Roth account. So now your kid has a Roth IRA. And if you do it when the kid doesn't have income, there's like kiddie tax laws that I'm going to send you to a CPA for because they're super confusing to me. But if you wait until your child has earned income, you can start your Roth conversions. I have a 16-year-old and a 19-year-old. So the 19-year-old doesn't qualify for the Trump account.

11:21The 16-year-old does, but I can only put two years worth of contributions into her account before she ages out, and it turns into a traditional IRA. But what if I Roth converted when she's 18 or 19? Now she's got$10 ,000 in her Roth account. I can't put$10 ,000 into her Roth account right now, but over the course of two years, I can put it into her Trump account and then Roth convert. And I'm not planning on using this for college expenses. This is just to kickstart her Roth account for her retirement. Because let me tell you, a 16-year-old does not want to save for retirement at 16. And that's where the strategy comes together for this, right?

12:05So, and I get it. Like Trump is a polarizing figure. This makes it very hard for many people to rationally assess the value of this account. They hear all these things. It's very confusing. But here it is in a nutshell about why this account is so powerful for my daughters, for example, right? Let's say I contribute the max to these accounts every year for the next 15 to 18 years as they grow up. Then they go to college, right? I've got my 529 in addition to that that pays for college, right? At that point, they earn a little bit of money, right, doing some kind of college job. Now we have earned income.

12:36They can now contribute to their Roth IRA, and they can roll over this account in the traditional IRA, the Trump account, which the Trump account is converted to, and begin putting that into the Roth at a very low tax bracket, 10%, 12 % tax bracket. Now their Roth could have several hundred thousand dollars in it by the time they graduate college or they're after their first few years of work, and they're post-fi effectively at that point in a really tax-advantaged way. I cannot contribute to their Roths for them until they have earned income. You must have earned income to otherwise contribute to a retirement account here.

13:08So that's the advantage. That's a very powerful one. You cannot dismiss it. These are not gimmicks. They're not like worthless accounts for this. They belong in the order of operations and they're very powerful for that reason. It's much better to do that than for them to inherit my Roth IRA, for example, if I were to pass because they have to distribute from that Roth within that 10-year window. So this is a powerful tool. And sadly, it will only maximally benefit people who are very wealthy who can go through the rest of the stack for the most part. It will be a small benefit for those who take the free contributions there.

13:36Yeah. But I'm not the only person who can contribute to Daphne's account, Scott. You could contribute to Daphne's account. Jeremy could contribute. Her birthday's in November. So if you want to write her a check and we'll use that birthday money to put in there. This is a great way for grandparents or aunts and uncles. I mean, I don't know if you don't have enough toys in your house, Scott, but when my kids were their age, there were toys everywhere and every year they'd have a birthday. Oh, what can we get them? Please don't get them another toy. Throw money into their Trump account. And if you don't like the name Trump account, they have another name.

14:10It's called the 530A account. So you can just call it a 530A if that makes your heart sing. Or the Biden account, right? Of course. What do you think about all this? Is that the right way to think about these accounts? I think like a little bit of a historical perspective is important because it almost goes back to the dawn of Social Security when, you know, in the early 1900s, the US government was like, oh, there's a bunch of broke old people. That's bad for society. Let's tax the young working people. We'll instantly give that money to the old people and solve our problem. And maybe that was very politically popular at the moment because it solves the problem instantly.

14:44But as populations shift, when there's a bunch of baby boomers retiring and there's more old people who are trying to take money out of the system than there are young people putting money in, that system breaks down as we're seeing with social security age getting pushed older, It's maybe going to go broke. And so I think that the idea behind this Invest America Act, as it was originally called, was to basically start all kids off with their own account. And if you look at how much money you put in Social Security over the years and what you take out, and you compare that to what it would have been if you were just investing it, it's eye-watering.

15:17You're like, oh, man, I have 90 % less money or whatever it is, because it's just a one-to-one transfer from young to old instead of a growth with the market for the 65 years of your life. And so while Scott, I think you're right, technically that, you know, if you're super wealthy and you're doing every single thing perfect by the book, that's where it falls in the order of operations. I think for like regular humans who, you know, live in a regular place who don't, you know, have 50 million spreadsheets, they're kind of saying like what Mindy was saying, which is they're going to throw some birthday money there.

15:48They might have an introduction to investing when they might not otherwise have because they're getting this thousand dollar incentive to get started. and just the idea that, hey, take your own retirement into your own hands a little bit instead of waiting for social security to give you, you know, some pittance when you're, you know, 67 and a half or whatever it is. I think that's kind of moving in a better direction so people will have more wealth. And to the Trump account credit, I think it's really well executed. I've always found it very, very hard to give the gift of investing. Like if I want to invest for my nieces and nephews.

16:21I know them very well. They're my brother's kids. I basically just have to give him money, write him a check or Venmo him or whatever. Then he just has to do it. He has to do something. He has to go open up an account, whatever it is. But the Trump account, so it's like a little share link. And anyone with that link or that QR code and a debit card can just put money in someone else's account. And so, yeah, that's not the correct order of operations. But the net result might be a lot of kids who didn't have, you know, like, you know, you talked about the power of it. If you're super wealthy and get your kid and, you know, avoid the required distributions of an inherited Roth IRA, like that's like the high income scenario.

16:57The low income scenario is you might have something when you had nothing, which I think is, is a really good thing for people. Awesome. Yeah. I think that's a great, a great call out there. And I, um, I did not realize about the contributions item items here as well. So yeah, that's a great alternative to like a birthday, you know, a present or whatever, or whatever it is for many of those kids. So I do want to call out where is this money coming from to fund the Trump accounts in terms of the gift that you get, the contribution that's just made if you open one? So there's two different places.

17:27So first, if you're a baby born between 2025 and 2028, which Scott, I think we both have one of those. All you have to do is just go to, and it sounds like an ad, but it's not actually because it has the word Trump on it. I've gotten torn to shreds on social media because people said, you're supporting Trump. I've gotten torn to shreds by both far ends of the political spectrum for what it's worth. But I mean, just on a note, very quickly, it was originally called the Invest America Act. And then through the wash of legislation, it came out the other side called the Trump account. But this isn't a Trump business.

17:57It's not like Trump crypto. It's not Trump hotels. It's in the IRS code, like Mindy said, like line 530A, and it's run by the Treasury. So this is like a government thing, not a Trump business thing. That said, that law that was passed said, hey, babies born between 2025 and 2028 will get a$1 ,000 contribution from the U.S. Treasury. So it's coming from taxpayers, you know, and so that's political, too. All money is political. But basically, babies are getting money just from taxes, from, you know, so we all throw money into the big tax pot. And then everyone, you know, each baby born gets a thousand bucks.

18:30And then, you know, these Trump accounts have also made it easy for large donors to basically try to donate to a large number of kids accounts. And so Michael Dell, the founder of Dell Computers and the Dell Foundation donated$6.25 billion. And he said, OK, if you were born before 2025, if you're still a kid, but you're under 10 years old, then you can sign up for a Trump account. And the first 25 million kids who weren't eligible for the thousand bucks, they'll get 250 bucks from this big donation he made. And so it comes from two places. The babies get it as part of law from tax money and slightly older kids between, you know, one and 10 years old get it from this Dell donation.

19:15Yeah, I want to point out that this is great. Like, like, you should like, I'm going to do this, I'm going to take the 250 bucks for my three year old, right? It would be crazy not to do that, I think. And I also want to call out that this is this was a very good investment for Michael Dell, right? Because I look at Dell stock, and in the last year, there is a 261 % increase in the value of their stock. And that is heavily concentrated around this kind of May 8th time period. I wonder if anything happened there, like a White House event or something like that. That's been very, very profitable for him.

19:45And another reason why these accounts, I think, trigger people, you know, arguably, rightfully so in many cases here. This is not an endorsement of any of these, of a politician or whatever. You have to get past this, though, I think, to make rational financial decisions for you and your family and understand that the account is a good tool that belongs in your arsenal, not a scam or fraud or something else there. It's a tool. You should be aware of it, when to apply it, and how to use it here, even if, you know, some of these things make you mad in some cases. Yeah, I don't, you know, was there a backroom deal?

20:16Was there a handshake? You know, I certainly think Trump has been a lot more freely tweeting ticker symbols and things like that, that any other president would be investigated for. But yeah, I agree with you, Scott, that you just have to run in your lane and look at what's right for you. And I think that, yeah, it's still a really cool tool that's being put out there. So, Jeremy, one question I was thinking about this when I was thinking about where the Trump account belongs in the optimal order of operations stack, which is the inheritance tax exclusion is up to like almost$14 million now. I think it's like$13.99 million per person or something around that.

20:48And that's$28 million for a married couple, for example. That can be given tax-free at a stepped-up basis in many cases outside of these accounts. And so what I was thinking was, is there really a big advantage over just building my wealth after tax in various areas and then sending that to my daughter's passing or at any point in my life if I want to gift it to an irrevocable trust before those things come up? I came to that conclusion that, yes, the advantage is that this builds into a traditional IRA that can then be converted to a Roth, whereas my general gifts to a revocable trust could not be converted into a Roth.

21:28And that was the number one advantage I could come up with for the Trump account over just transferring wealth outside of those accounts. Is that the right way to think about it, or how do you think about it? I think it is. And, you know, again, it's this tradeoff between are you willing to accept the restrictions in the hopes of some lower taxes? And I think it's good to put some numbers out. So I actually made a spreadsheet comparing if you invested in a custodial AGMA-ATMA versus a Trump account. What was that word? Is that English? Just kidding. Can we define it for people who don't know that term?

22:01The AGMA-ATMA? Yeah. Okay, so UGMA stands for Uniform Gift to Minors Act and UTMA stands for Uniform Transfer to Minors Act. These two acronyms that basically mean we're going to put a brokerage account in a child's name and the adult is going to be the custodian of it. So if you say a custodial account. That's what I think most people are familiar with, yeah. Right, that encapsulates the UGMA. I've heard it called like half-half of other people say UGMA UTMA or custodial. But basically, that's the option that already existed. We can all go open up a custodial account today for our child and invest, but you don't have this tax-advantaged nature of it.