Are Trump Accounts Worth It? (And What's Actually Better)

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1:30Wayfair, every style, every home. On this episode of the Personal Finance Podcast, we're going to tell you everything you need to know about Trump accounts.

1:47What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co, and today on the Personal Finance Podcast, We're going to be diving into an account that was just created that could benefit your kids. If you guys have any questions, make sure you join the Master Money newsletter by going to mastermoney.co slash newsletter. And don't forget to follow us on Apple Podcasts, Spotify, YouTube, or whatever your favorite podcast player is. Cannot thank you guys enough for following the show. And if you're getting value out of the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player.

2:30Now, today, we are going to be diving into Trump accounts. And when we go into this episode, I'm going to start this episode off by saying this. This has nothing to do with politics. And if you are utilizing this as some political way for you to forego doing this, that is completely fine. And that is your choice. But at the same time, I want you to understand, I don't care if you are liberal. I don't care if If you are a Republican, I don't care if you fall into the middle and you are independent. This show does not get political. Now, if there's something that's happening in politics that causes harm to you, my audience, my listeners, I'm going to speak out about it.

3:06But we don't get political at all in this show. Why? The reason for that is because my entire goal is to serve you. And all I want to do is serve my audience. I want you to have the best possible opportunity to build wealth for you, to build wealth for your spouse, to build wealth for your family, to build wealth for your parents. I don't care who it is. Our goal is to help you build generational wealth. And my goal is to serve you. And so the reason why we're diving into this topic today is because this can benefit you. If you don't want to take advantage of it because you disagree with something on the left or something on the right, then you don't have to.

3:42But at the same time, there are some benefits here that can really help you, especially if you have kids on hand. There is free money to be had here. There is opportunity to move this money into a Roth IRA when your child gets older, which we're going to talk about one of the best tactics for this. But if you feel as though you are not going to do this because of political reasons, that's fine. Skip this episode, move on to the next episode if you want to. But I am going to talk through exactly what this account is and why it is so incredibly important. Listen, I truly appreciate every single one of you.

4:12I love every single one of you and I want to serve you. I want to make sure that you have the ability to build wealth. What I do is I help people go from having a messy life. Maybe they have a messy financial life, or maybe they're just trying to figure things out, or maybe they're trying to fit together and put together certain pieces. I help them put those pieces together. And then I put them on the path to financial freedom because I believe every single one of you can become millionaires. And secondarily, I believe every single one of you can have financial freedom. And the most valuable asset that you can have in place is financial freedom.

4:43But you can also give that to your kids. You can also give the opportunity to your kids to get a head start in life that you never had. You may have come from nothing in life. And most of you out there listening to this podcast probably came from nothing. And I think that's great. You know why? Because most of the time, people who come from nothing, they're the ones that work the hardest and they earn it. They earn it when it comes to getting to the next level. They're the scrappiest. They're the ones that stay the most disciplined. They're the ones that get after it. Why? Because they never had it.

5:12They know what it takes to get there. And you are one of those people. I know you are one of those people. And I'm going to give you these motivational speeches more and more because this is what this is all about. This is what the show is all about is we want you to have the opportunity to build wealth. You may have a lot of wealth right now. We have a lot of really wealthy people who listen to this show. We have a lot of high earners who listen to this show. You may have nothing at all. We have a lot of blue collar workers who are just getting started. We have a lot of entry level job workers who are just getting started.

5:39It doesn't matter where you are. We want to come together as a team to learn how to build wealth together because money is no matter how much you like it is in every single part of your life it is a part of the decisions that you make it is a part of your psychology it is a part of your emotions it's going to cause stress in your life it's going to cause anxiety in your life it's going to cause marital problems in your life it is going to cause all these different things but you can eliminate all those just by understanding how to build wealth So I'm gonna teach you today how the Trump accounts work.

6:14I'm gonna teach you exactly some of the ways that you can use them to your advantage. And I want you to use them to your advantage, especially if you have kids. If you don't have kids, this is not gonna pertain to you either. But if you do have kids under the age of 18, this is gonna be something I want you to follow along with. Okay, so Trump accounts, what are they? These are accounts that allow you to contribute money to your kids every single year. Now they work similar to like a traditional IRA or your 401k and all those different things. Now, as of July 4th of this year, the government literally is handing your kid$1 ,000 in free money.

6:48So here's what we're going to be covering today, okay? We're going to talk about what Trump accounts actually are. And spoiler alert, like I already said, it's a traditional IRA in a costume. We're going to talk about the free money. Who gets the free money? And if you are not taking advantage of the free money, I don't know what to tell you. And the deadlines. We're going to talk about eligibility and key rules. I'm going to talk about the tax benefits and the one catch that people most misunderstand. I'm gonna talk about the hidden wealth building play, which is this is the fun part. There is one thing that most people are not talking about that I think you need to know when it comes to these Trump accounts on a way to get this money into a Roth, which is really, really powerful.

7:23Now that you have the loophole with the 529 to get money into a Roth and you have the ability to get this money into a Roth, boy, oh boy, your kids could have a big old Roth at one point in time. I'm gonna talk about who should not use this account because this is not for everyone and the exact steps to open one today if you do want to open one. So what is a Trump account? Let's talk through this first. So officially, a Section 530A account is the technical term for this. You don't have to memorize this. You don't have to know that. But it was created by the one big, beautiful bill act. And it is a new type of traditional IRA built for kids under the age of 18.

8:01So those of you who don't know what a traditional IRA is, This means money goes in that you do not pay taxes on. It grows. And when you pull the money out, you have to pay taxes on those dollars then. At some point in time, always remember this, Uncle Sam is going to want his money. And so you wanna make sure that when you pull this money out, you understand the tax implications. And it's gonna be when your child pulls the money out, you understand those tax implications. Now, this is built for long-term retirement money. That's the goal with the Trump accounts. That's the reason why they're creating these is to get a headstart when it comes to this money.

8:32This is not for college. This is not for a car. Those are very different accounts that you can open if you do have those goals for your kids. This is for long-term retirement. So let's talk about the free money because I think that's what most people want to know. And most people wanna understand, hey, who gets this free money? How can I get some of this free money? And some of you may have already gotten free money. We've talked about this in Master Money Academy months ago when it was first announced, talking to a lot of our students in Master Money Academy me saying, hey, you need to open one of these because the free money is coming.

9:04You need to take advantage of that. A lot of our students have been getting that free money, which has been absolutely awesome. So the$1 ,000 government seed is a one-time deposit, but this is only for children who are U.S. citizens born between January 1st, 2025 and December 31st, 2028. Now, my youngest daughter was born October 30th of 2024. So I missed this by just two months. So I can't take advantage of the free money in the first$1 ,000 seed. And so many of you may be saying, okay, well, first, if you have children that are going to be born between those years, 2025 to 2028, maybe your wife is pregnant right now.

9:44And you know that this is coming in the line. It is a absolutely take advantage of that 1000 free dollars. I don't know how else to say this. It is free money, literally free money. Now, everything always comes with a catch is the comment that I always see under people's Instagram posts or TikTok posts when they're talking about the free money when it comes to this. Okay. But it's free money coming to you. Otherwise you don't get the free money. So which one do you want? Taking advantage of the free money is something you should be doing. Okay. Number two is there is also free money coming, which is the$250 Dell gift.

10:19So Michael and Susan Dell from have a foundation, you know, Dell computers, that's who these folks are. And they are funding$250 for up to 25 million kids age 10 and under in qualifying zip codes. So the catch is these kids must have been born before January 1st, 2025. So it is the consolation money for kids who just missed the federal seed window. So you can check your zip code to see if you fall within those lines to take advantage of this. Now, neither of these are going to count against your own contribution limit. These are stacked on top because this account does have contribution limits, which we will talk about in a second.

10:56Let's talk about the$1 ,000 seed for a second, because if you miss out on this money, because you feel as though you just don't want to take this money, then let's talk about what happens. A$1 ,000 seed alone invested at a 7 % rate of return, which you know, that's pretty conservative for me to say, your boy likes to talk about a 10 % rate of return. So at a 7 % rate of return left untouched grows to roughly $3 ,380 by age 18. You may be saying to yourself, what do I care about$3 ,380 by age 18? But it can reach around$490 ,000 by age 65 just by taking the free money. Just by taking free$1 ,000.

11:38Now, this is the power of investing for your kids right away, early and often. And if you've ever heard me talking about investing for your kids, one of the first things I always wanted you to do, and I've been saying this for years, since 2020, is when your baby is born, put$1 ,000 into a taxable brokerage account for them. Why? Because it can grow to$500 ,000 by the age of 65. And if they leave it in that account, boy, oh boy, I'm pretty happy mom and dad gave me that, aren't I? Some of you may be in the background right now saying, well,$500 ,000 at the age of 65 is not gonna be worth anything.

12:10Boy, oh boy, does that fire me up. You know what else is worth nothing? Zero. Zero dollars is worth nothing. So I think$495 ,000 is a little bit better than$0. And I think when we talk about this kind of stuff, the objections are absolutely incredible when it comes to this stuff. Now, if you don't want to invest for your kids because of a principal reason, I get that. Because you don't want to spoil them. Maybe you grew up spoiled or you had friends who grew up spoiled and you don't want to give them any money whatsoever. That's a different story. That's a different parenting tactic. And that is a different thought process.

12:45I commend you for that. I respect you for that. But if you just don't want to do this because you feel as though$500 ,000 is not going to be worth as much as it's worth right now, my friend, come on. We need to reframe our thinking. I want to help you and I want to help your family. That's my goal. That's all I'm trying to do here. And so when we think about this, take the free money, please. Please take the free money. That's all you got to do. All right, next. Now, who is eligible under these key rules? Because we need to understand eligibility when it comes to who can actually open a Trump account, okay?

13:18So anybody under the age of 18 can actually open one, but a child must have a valid social security number and be under 18 on December 31st of the year that you open it. And you can only have one account per child, obviously. Now, who can open it? A parent can open this, a legal guardian can open this, a grandparent can open this, or even an adult sibling can open this account for the kid. And the IRS Form 4547, Now, you can open this via the IRS form 4547 or on the online portal, trumpaccounts.gov. Now, for those of you who haven't seen trumpaccounts.gov, there's also an app, by the way. It is a slick website.

13:53Why is it a slick website? Because Robinhood is the one behind this. Robinhood is the one that is working with all this stuff. And it is a really, really nice experience. Robinhood probably has the best experience overall. They have sports gambling on their app, but they probably have the best overall app experience in the way that you can actually invest your dollars. And so it's one of those things that they have a pretty slick website there. Now, the contribution limit, remember we talked about, okay, well, the thousand free dollars doesn't count towards your contribution limit. Well, this is gonna be$5 ,000 per child per year from all individual sources combined.

14:26So your grandparents can contribute, the parents can contribute, some siblings can contribute, your uncle Rico who can throw a pigskin over the quarter mile over the mountains, he can contribute to. All these people can contribute to this account if you want them to. and no earned income required. So they don't have to go out and earn income like you do with a custodial Roth IRA. They don't have to have that earned income available to them. This is the whole reason that you can fund this from birth is you can take advantage of this and you can contrast it with a normal Roth IRA. Now, an employer can put in actually$2 ,500 per year.

14:57So some people don't know this, but you have the ability to either ask your employer if they will add this benefit at$2 ,500 per year. And that counts inside the$5 ,000 cap. So this is worth flagging for any business owners that are out there or high earners who are not rich yet, you know, or any high earners out there. If you own a business, you can actually put$2 ,500 per year in this account from your business. So guess what your boy's going to end up doing? I've got a business. I've got three kids. I am going to be contributing to this account from the business as the employer. $2 ,500 per year for my kids.

15:33Now, I can also put my kids on payroll. and if I put my kids on payroll, then they're gonna be a custodial Roth. But guess what? My kids are seven, five, and one and a half. The only thing that I can think of my one and a half year old to do is maybe some baby modeling and I don't wanna put her on screen. So in reality, this is a great workaround if you do own a business or you have a side hustle that makes enough, you can actually contribute to these accounts if you have an LLC. Really, really cool stuff and I think that's a great add-on for some people out there. Now here's one thing I love, the fund that they put this money in.

16:06So when you contribute to a Trump account, they put it in a wonderful fund. So they put it into SPYM. I'm going to pull it up right now, okay? And I'm going to go and just kind of evaluate this really quick so that you can see exactly what SPYM is all about. It has a very low expense ratio and it's investing in the S &P 500. This is the state street portfolio of the S &P 500 ETF. Very similar to a VOO. If you're a VOO investor, a lot of you out there are. Very similar to an SPY, but this is SPYM. it is a very low cost ETF that invests in the S &P 500. And the beautiful thing about this is that SPYM has the lowest cost in ETFs out there for the S &P 500.

16:49You know, I absolutely hate in costs when it comes to these index funds and ETFs. And when they start to add some of these costs in, it is one of those things that drives me up a wall. SPYM doesn't have that. So the beautiful thing about this is your money automatically gets invested into SPYM right off the bat. And that is something where it's just the 500 largest companies in the stock market. If you don't know what an ETF is, it stands for exchange traded fund. And it's just investing in the 500 largest companies in the U S Apple, Amazon, Google, Nvidia, these massive companies that you all know very well.

17:20Uh, that's what you are investing in all 500 of them. So it's a diversified portfolio long-term. Now here's the cool thing is that there is some investment restriction in here. So funds must sit in low cost index funds or ETFs tracking the S &P 500 or a similar mostly US index with a fee cap of 0.10 % and no leverage. So it is simple and it is cheap by design. They are teaching to invest in a very simple, similar way that we teach here when it comes to the personal finance podcast, Master Money Academy and Master Money. So this is what we teach is low cost index funds that just invest in a broad base of funds okay now there is a lockup and growth period that runs from birth to december 31st of that year before the child turns 18 during that time you contribute but you generally cannot withdraw during that time frame now they can account converts on january 1st of the year that the child turns 18 not on their actual birthday so a december birthday still flips on january 1st that's just extra caveats that you need to know.

18:25I'm going to try to give you as much as possible in this episode because you know everything about these accounts. You're going to be the most well-versed person about these accounts by the end of this episode. And that's my goal with this. So that's going to be some of who is eligible and some of the key rules in place. Again, some of the key ones are$5 ,000 contribution limit per year. Employers can put in$2 ,500 per year, but it's going to count towards that contribution limit. The$1 ,000 that you get in free money does not count towards that contribution limit. So these are just some of the key rules that you need to make sure that you have in the back of your head.

18:58Now, let's talk about the tax benefits here and the tax benefits when it comes to investing in these accounts long-term, okay? First is this is not a Roth IRA, okay? Not yet. So this is not something where the money is gonna come out tax-free. Contributions made directly by parents, grandparents, or other individuals, when those dollars went in, they were after-tax dollars typically. So that becomes the basis, okay? That becomes the basis of where this starts. What gets taxed is all the growth. So all the money that grows, let's say you have these dollars invested over that timeframe and you put$1 ,000 in and it grew to$500 ,000.

19:36Well,$499 ,000 will be taxed because of that growth has not been taxed yet. Now, the money that your parents put in or the grandparents put in, that's already been taxed, okay? So you don't have to worry about that. That's gonna be the basis. Now, after 18, it behaves like a traditional IRA. So a 10 % early withdrawal penalty, meaning if they want to pull this money out to buy a brand new Ferrari or Lamborghini, they're gonna have to pay 10 % on that money. This is a risk that I think some people need to consider because when you put money in a Trump account, it becomes your child's money after the age of 18.

20:09And so this is something that I seriously considered when I was thinking about investing for my kids. The reason why my kid's money is in a taxable brokerage account is because when I keep it in that taxable brokerage account, I have full control. And I put it in my trust and they get this money at certain ages so that they can utilize this money when they want to. But if it's in a Trump account, they get this money at 18 and it is fully theirs. If they want to go blow it all and pay that 10 % penalty and do something stupid with it, they can absolutely do that. And so I want you to make sure that this is one of those areas that you consider when you are thinking about opening these accounts.

20:47If you have a knucklehead that is under your roof, you just want to make sure you're thinking about that. OK, a Trump account used for college is taxable as ordinary income also. So there is an education exception, but it's honestly, if you're going to use and save for education, use a 529 account. That's what we teach here is we want you using a 529 plan. I mean, you know, do the pros and cons, do your own research, yada, yada, yada. but a 529 plan quietly wins for pure college money. That is what I think most people need to realize. The only reason why you'd open a 529 is to save for college.

21:17That's the only reason, okay? You can roll$35 ,000 of the 529 into a Roth IRA if you want to, but there's some rules and parameters around that. So you need to understand those rules. So that's part of your out. If your child does get a scholarship or they decide they want to be a plumber or electrician, you can also use it for the trades. So there's a lot of outs when it comes to a 529 plan now, but it is one of those things that you just want to make sure that you understand the tax implications of this your child will have to pay taxes when they pull this money out on the growth of that money when they're you know at retirement age so this is just something else to consider now here's the fun part okay this is the fun part about the trump account and i think most people need to hear this is there is a hood what i call a hidden wealth play which is the Roth conversion window.

22:04This is the part that is the most misunderstood portion of the Trump account and the part that you can really get a lot of money in your kid's Roth IRA and pay minimal taxes on these dollars. And boy, oh boy, is this fun. Now let's talk about this. Let's talk about this Roth conversion window. So first let's set this up. Okay. A Trump account is not a Roth. Some people have, for some reason, have this misconception that it is a Roth. It is not a Roth. But once your child turns 18, they can convert the traditional IRA to a Roth IRA. So why is this huge? Because this is a legal backdoor into the Roth that does not require the child to ever have earned income.

22:45So right now, to have a Roth IRA when you have a child, even if you want a custodial Roth IRA where your parents are working on it with you, your child has to have earned income to contribute to that Roth IRA. And if they only earn$2 ,000 in a given year, you can only contribute$2 ,000 in a given year. If they earn$5 ,000 in a given year, you can contribute$5 ,000 in a given year, all the way up to the contribution limit that everybody else has, which is$7 ,500 per year. And so because of this, this is just makes it tough for a lot of kids to be able to contribute to a Roth early. But with a Trump account, and this is what I plan to do with it, okay, you can contribute money to your Trump account, okay?

23:24Then there is a legal backdoor Roth that you can do because your kids don't have earned income. That is okay. And this was not possible before. It was not possible to do this before, but now you can convert during the low income years. So let's say, for example, your child turns 18. They go to college and they really don't have much income. Now you got to check with student loans. You got to check with all these different things. Now you got to check with FAFSA. You got to check with scholarships. You got to check with student loans to see what is going to be qualified as income if they do go to college.