Hi. Welcome back to a very special episode of the Great Retirement Debate. Ed, good to be back with you. It is good to be back. And we're talking about something that's coming very soon, new Trump accounts. That's right. This is a very special episode on the new accounts, the five thirty a or Trump accounts created by the One Big Beautiful Bill Act last year. And Ed, I think our question for debate today is, are Trump accounts the biggest deal ever? Well, they are a pretty big deal. Everybody wants to know anytime you offer free money, everybody wants to know how do I get it. That's a good point. I like free money, too. You know what? If we talk about is it a big deal, I think it really comes down to is it a big deal from interest from people, or is it a big deal from a planning perspective? And I think ultimately, we're going to find that the answer to those are two very different things. There's a lot of interest, but I don't know that the planning hype is as real as the hype around the creation of the accounts. But before we kind of dive into whether or not these are the biggest deal ever, let's start with just what are these? So at a high level, Ed, what are Trump accounts? For somebody who's not heard of them at all or just hasn't really gotten into it, what is a Trump account? A very high level. Well, basically, they're defined as IRAs Okay. With two periods. One, the period up to the child is eighteen. They call that the growth period. And once the child starts his eighteenth year, they turn into actual IRAs. So effectively, this is another type of tax preference account. So we have things like IRAs and HSAs and 401ks and five twenty nine plans. The Trump account is just another type of tax preferenced account that people might benefit from because of its built in tax advantages. Correct? Yeah. But it has unique advantages over IRAs and most other accounts in that growth period up to the year the child turns eighteen. All right. So let's start by maybe breaking down these two periods. And you mentioned this growth period. I actually find it really interesting because I think it's a very mislabeled term to Well, I use it because that's what the tax law calls it. That's right. The tax law does call it the growth period. But it's when you can make contributions. And then after that, you can't. To me, the part where you can't is the growth period. But nevertheless, you're right. It's called the growth period. So the growth period is that initial time from when a child is born through age seventeen. And in order to establish one of these accounts does have to be someone with a social security number. And a lot of people are thinking about these sort of along the lines of five twenty nine plans because they're for young people. I think one of the biggest differences is you can sort of pre fund a five twenty nine plan by establishing one for yourself and then changing the beneficiary. With these Trump accounts, whoever the money goes in for, it's theirs always. There's no changing of the beneficiaries. You actually need a living person. So you can't start funding these, if you will, beforehand. It has to be when a child is born. They have to have a social security number. And again, this initial phase goes from the year or when the child is born up through the year the child turns seventeen. In the year the child turns eighteen, there's other rules. So let's start That's when it turns effectively into an IRA following all those rules. All right. So let's let's go into the unique period, this zero to age seventeen time. First off, how much can someone contribute? Well, there are several limits, but let's get right into the one that everybody wants to know about, the free thousand dollars seat. Free money. Okay. Yes. Alright. Nobody should turn that down if they qualify. But I think the bigger picture is because they hear what they want to hear. It's not like you can get one thousand dollars and go out and buy a big screen TV. That's right. That is literally locked up until the year the child turns eighteen. Yeah, there's very little access. That's one of the unique things about these accounts during that growth period is from zero to eighteen, basically, you can get the money if you do a rollover to another Trump account. You can get the money at age seventeen if you do a rollover to an Able account, if we're looking at a disabled beneficiary. Or you can die. That's it. Those are your options for accessing the money. I mean, there's really not there's no special rule for if you have an emergency or anything like Right, no early distributions. But it's meant that it grows for at least seven up to the end of the seventeenth year, and that's probably a good thing. Yeah. I think one of the biggest things as we get into this one thousand dollars the biggest thing I would encourage people to do is to think about these as retirement The primary purpose of these accounts is retirement. I know, again, because it's for young people, there's been a lot of talk about should these replace UTMAs? Should these replace five twenty nine plans for college savings? If we're looking at near term savings, there are almost always going to be better options. These are first and foremost retirement accounts. And I mean, that's evidenced by the fact that once you turn eighteen, if you use the money for a a non, a nonexempt purpose, you're going to be hit not only with income tax but a ten percent penalty. So let's go back to the contributions, though, because I do think that's one of the more complicated aspects of Trump accounts. There are actually up to five different types of contributions. So you already mentioned one, this seed money contribution or the so called pilot program. And one of the big differences is that this pilot program for Trump accounts is a temporary provision of the law. It's only active for children born between twenty twenty five and twenty twenty eight. But if you've got a child or someone else in your family that is born in those years, well, then they're entitled to that one thousand dollars And Ed, as you said, dollars one thousand is one thousand dollars Nobody should turn that down. You might love the president, hate the president. You might love the name of these accounts and hate the name of these accounts. At the end of the day, dollars one thousand is one thousand dollars In ten years, dollars one thousand might be two thousand dollars In twenty years, it might be four thousand dollars It might be more than that if it grows. Why turn away that free money when all you have to do is fill out a form and check a box? That's I find when I do programs, I do lots of consumer programs. When you talk about saving money, saving taxes, or building money, everybody's in. There's no politics. All right, let me look at the camera right now and say this. Take the one thousand dollars All There's really not a downside to that. Now, that's one type of contribution. That's the seed money contribution. As I mentioned, there's five different potential types of contributions. Another one, the very simple one, is the rollover contribution. Basically, you want to move money from one Trump account to another, you can. But there are three other types of contributions that people need to be aware of. One is what I would call your regular contribution limit. It's like mom and dad and grandma and grandpa putting in the money to the Trump account each year. And that limit is five thousand dollars per year. And unlike traditional IRAs or Roth IRAs, you don't need earned income. Right. That's one of the big benefits of that. And that's an overall, what we call aggregate limit because one of the other sections you're going to talk about is maybe companies putting in That's right. And that would cut into that twenty the twenty five hundred. That's right. There's another so the fourth type of contribution so so far we've talked about your regular mom and dad, grandma and grandpa contributing the five thousand dollars limit, the free money of IRA excuse me, the pilot program rather than And the pilot program does not cut into the five thousand dollars That's right. And then we've got the rollover contributions. Then beyond that, there's employer contributions. And this can come in kind of one of two flavors, right? There's employer contributions where, in theory, the employer might be very benevolent and say, hey, anyone who's got a child here who is under the age of eighteen, we're to put money into a Trump account for you. And it's just an added benefit. I don't see too many companies going that route. Where I see more companies potentially allowing for employer contributions is via what are called Section one hundred twenty five cafeteria plans. People listening, you might have an opportunity to take some of your salary and put it into a dependent care flexible spending account or a health care flexible spending account. In other words, instead of you being paid directly, your employer takes that off of your paycheck and then pays it directly for you. And the benefit of this, of course, is that it's pretax money at that point. We'll talk about the two thousand five hundred dollars limit and how it intersects with the That's right. Well, I'm going to do that one second. I want to get down to the last one here. So that two thousand five hundred dollars is per employee. So if you have multiple children, it's still two thousand five hundred dollars Two children, you can do twelve fifty dollars apiece. Dollars two thousand five hundred to your favorite kid, zero to the kid you don't like, whatever you want. But it can't be more than two thousand five hundred dollars And then we get to the last one, which is a charitable contribution. There are new organizations that are popping up. And you've probably seen in the news Ray Dalio and Barbara Dalio contributed some obscene amount of money to make this happen. I think a couple millions of dollars for Connecticut residents. There was a six dollars plus billion contribution From Dell. From right? And then I think Nicki Minaj came out and promised to do one hundred and fifty thousand dollars to three hundred thousand for her Nicki Minaj fans. So By the way, as he was saying this, this is not as easy as it sounds. It has to go to a defined geographic area. You just can't pick these four friends here. Who get a very defined geographic area. The people who live at this address on this date. Yeah. No. That you're right. It has to be a defined class. So for instance, I think the the Dell contribution is is going ZIP codes. Yep. But going by Under a hundred? Oh, that's the Dalio one. It's gonna be to to to to zip code. Yeah. Under a hundred fifty thousand dollars. And and then in Connecticut sorry. In Connecticut is the Dalio one. The Dell one goes to zip codes. So it's not that simple. Yeah. And and ultimately, it's gotta go through a real charity. Right? Like, that's What's interesting about that, there's no limit on that. That's right. Yeah. Well, and that's really one of the interesting parts. So to me, the most complicated aspect of this is all the intricacies of the contribution limits and the way the rules work. So we talked about limits. We didn't talk about the tax treatment of them. When we're talking about the limits, the five thousand dollars limit is impacted by the regular contributions you make That is a coordinated limit for those amounts. So if your employer puts in two thousand dollars you can only side contribute three thousand dollars Well, let me stop you there because I could see this happening. Graham Oth says, oh, dollars five thousand. What a nice thing. I'm going to put five thousand dollars in that account, assuming it's set up all properly. And then what happens if the employer also put in, say, two thousand five hundred? Well, some of that money is going to have to come out as what is called an excess So there's got to be some communication. Good luck with that. Well, you know, one of the interesting things, though, is that in order to make this a little bit easier, you can only have one Trump account at a time. So at the end of the day, that custodian should be able to to help you a little bit more than a traditional IRA contribution might because you can have ten IRAs at ten different custodians, and they would never know that you made those contributions elsewhere. With the Trump account, since you are theoretically limited to only one Trump account, if all of a sudden that custodian receives ten thousand dollars of contributions during the year, one would hope that custodians would develop some sort of procedures to help alert individuals that they have over contributed. But that remains to be seen. But that five thousand dollars again, it's the regular contributions and the employer contributions. All the other ones don't count. So rollovers don't count. The foundational or nonprofit contributions, they don't count. The the thousand dollar pilot contributions, that doesn't When you say it doesn't count against the five thousand overall. That's right. That's clear. So you could get a thousand dollar regular or pilot contribution program this year, and you could put five thousand dollars in via regular contributions. But you couldn't, as you say, put five thousand of regular contributions and twenty five hundred employers. That's one of the complicated aspects of this, which contributions count towards that limit, which don't. The other thing that's complicated is the regular, quote unquote, contributions you make, that five thousand dollars creates basis in the Right after tax. And that's the only kind of contribution, grandma, parents. That's right. That's after tax. That's right. Everything else is tax free when it goes into the account or pretax, if you will, which means it's all going to be taxable when it comes out. And Ed, of course, this brings up one of our favorite rules. Pro rata rule? The pro rata rule dealing with distributions. Yes. Yeah. But that brings us to the eighteenth year. That's right. That's not going to happen. All right. We've now got to age eighteen. So what happens at age eighteen? Well, here's one of the things some parents have actually questioned. It's come up with some of our advisors that are talking to people. So you've seen some of the numbers. They say, well, if grandma puts in five thousand dollars or the one thousand dollars and for eighteen years, it could be two hundred thousand dollars at eighteen. And then the parents say, Wait a minute, so at eighteen it's the child's IRA? That's right. It's their money? I have no control? Nope. They can just spend it. That's it. It's all taxable plus a ten percent penalty of taxes. Can you imagine putting in all that money for your child or grandchild then having them go, yeah, I'm gonna give a lot of it to the IRS in the form of a penalty or tax? Well, I don't think they were thinking IRS. They were thinking, you know, whatever. I don't even know what they'll be thinking in eighteen years, but it's gonna be something grandma probably didn't approve of. Yeah. Well, that's one of the challenges with building a large account like this is that you But that would happen anyway if they did a uniform transfers to minor accounts. Yep, by twenty one or twenty five in some states. Maybe a little longer, but still, you're right. At some point, it becomes It's their money. A child's money. But assuming they're prudent and the parents educate them along the way, and by educate them, I mean don't tell them it even exists. That's probably the best way to do it. Don't even tell them the account exists. At that point, a couple of things can happen. It becomes an IRA and it can be converted to a Roth IRA. But if they do that, let's say, at eighteen, nineteen, you know where I'm going, twenty, twenty one, twenty two, twenty three, twenty four, what could happen? The kiddie tax, of course, until twenty four. Yeah. Which, you know, the kiddie tax, this is effectively unearned income. So to a large degree, it's going to end up being taxed at the parents' rate. And while the parents' rate may not be high, chances are if you're not in a high income scenario, you're not socking away five thousand a year for your kid Right. Right. Each year. So it's almost always gonna be for someone who's already in a high tax environment, which means we probably need to look at waiting until the child is twenty four or otherwise ages out of the kiddie tax Right. In order to make those Roth conversions. Or just use the smaller amounts for the first part. Like, in twenty six, I think it's about two thousand seven hundred. The first thirteen fifty is Very small. Yeah. You'd be looking at super small conversions each and every year. But yep. But I think during this whole period, and who knows, in eighteen years when we do this, I don't know, the umpteenth edition of this podcast, hopefully there was communication about this. And the parents either don't tell them or educate them that this money has been saved because it's a great idea. Imagine kids coming out at eighteen with a couple of hundred thousand dollars available to them. All right. So so we we've now kind of really covered a lot of the rules. Some of the other rules that people just should be aware of, the the investments for this, at least during age zero to seventeen, very limited in terms of has to be a broad US. It has to track like a broad US index. The expenses have to be a tenth of a percent or lower. So there's some other rules here that apply. But I guess the biggest thing I want to know, Ed, is when we talk about are these a big deal, let's to me, it's are they a big deal from a planning perspective? Should people use Trump accounts when there are other options? So let's compare it to UTMA accounts, five twenty nine plan accounts. Or the parent's own brokerage accounts. Sure. You know, that may be one way to get around that other problem where they told the kids money. The parents just save maybe in their own Roth IRA or their own brokerage account and earmark that in their mind. Just gift it to the kids later Right. So what do you think? Like, compared to other accounts, Trump accounts, big deal, not big deal? Well, are some part of a deal, and probably most people should consider it again. I hate to say it for the thousand dollars and maybe company contributions. It's good to have in the bank any time you can start with something and have all that eighteen years or even if if a child is, say, already fifteen, so in another few years of some growth. I think that's fair. You know, there's been a lot of hype about this a couple months ago. There was a Wall Street Journal article talking about the the millions of dollars in next egg that the Trump accounts can create. I I think that's true, and there's some value certainly in the tax deferred element of this. But when you compare the Trump account to other options, for instance, if I think about college education, to me, in almost all circumstances, the five twenty nine is still going to be far superior when we think about college education and funding, prefunding for that. If we're looking at a five twenty nine plan, all that growth is tax and penalty free if you're using it for education. With the Trump account, at age eighteen, you could use that money for college without a ten percent penalty because it would be eligible for the IRA exception for higher education. But it's otherwise going to be taxable. So I think that is a pretty compelling argument still for the five twenty nine plan for dollars that are earmarked for education. And if you're earmarking it for education and the child doesn't go to school, with a five twenty nine plan, you can kind of undo that decision. You could always change the beneficiary back to yourself even. Right. Right. Whereas with the Trump account, as we've talked about several times, that's not the case. But some people have maxed out. Some of these five 29s have gone too far. And, they're having problems on the other side being overfunded. So a Trump account could be another vehicle or their own brokerage or a UTMA account. That's right. I think I think an UTMA account is a very compelling argument here. In fact, I've done a lot of the the math behind this. And there's a really good argument that if you are tax savvy with your UPMA accounts, meaning each and every year, you talked about this free amount of like two thousand seven hundred you could capture two thousand seven hundred dollars inflated over time of free long term capital gains in an UPMA account. In other words, if you put five thousand dollars in this year, and next year after a year and a day, it was worth seven thousand seven hundred dollars you could capture that gain tax free, Go back, sell it right now this instant, like snap my fingers here. And then hopefully our microphones pick that up. And then buy it back now. And now you've got seven thousand seven hundred dollars of basis in your same investment. It's all tax free. Effectively, we have accomplished our goal still of having a tax efficient investment. And if you look at the monies that would be available when a child reaches age eighteen, twenty two, twenty four, when they age out of the kitty tack, there's a compelling argument that the atma is actually more tax efficient. Now It doesn't have any limits either, though. That's right. You can put more than five thousand dollars in. Now where the Trump account may actually have the long term benefit is if we think about what that person might invest in over time, if they want to be a little bit inefficient, if you will, trade on their accounts or maybe buy things that kick off interest, then that tax deferred wrapper of the Trump account from twenty two, twenty three, up through age sixty five, seventy five, whenever these ultimate dollars are distributed, that can make it more valuable. The other area I see By taking away what we call the tax drag. That's exactly right. Instead of paying tax every year on the interest, dividends, and capital gains, you get it tax free. But if you're going to be somewhat tax efficient with your investments let's say you just want to buy an S and P five hundred index fund and hold it until you're sixty five, which might not be the worst idea in the world in some cases it's kind of tax efficient by itself. You're not selling it. You're not creating anything. So ultimately, everybody's still got to look at this on their own. But I think there are a few things we can definitely say as every situation is different. So I'll say not always. But the overwhelming majority of the time, think we can agree it is absolutely something where if you have free dollars, you should be taking advantage of Oh, of course. Yeah. And if you've got a Trump account established for someone and there is any pretax money in there when the child reaches age twenty four or when they otherwise age out of the kiddie tax, that is a prime opportunity to do those Roth conversions. That should be like a almost a no brainer. You know? One other point. I wasn't even gonna mention it. But I think some of the estate attorneys have brought up this gift tax problem. Oh, yes. I only mention it because people are talking about it, and I don't think it's gonna be a problem. Let me explain the problem. The everybody gets to gift in the a free annual exclusion amount. For twenty twenty six, it's nineteen thousand. You can give that much tax free to anybody. So that would come under that. But it doesn't because under tax law technically it's not a completed gift because the child can't touch it until it's eighteen. So it's a gift of what we call a future interest, which means you can't use it against the nineteen thousand dollars It has to cut into your now fifteen million exemption, but that has to be reported on a gift tax return. How often do you think that's gonna happen, Ed? Probably not. And I think they're going to change it because they had the same issue, if you remember, with five twenty nine. They changed Just putting that out there because you may see some things, some people warning. I know we wrote about it on our blog about watch out for annual seven zero nine gift tax returns. But all in all, it's something virtually every family should consider. Yeah. I think I think it's I think ultimately, look, it's just another option for folks. And for some people, it's gonna be a an account that they save a lot of money in. For some people, it may just be the one thousand dollars And and I'll go out on a limb here, Ed. I'm gonna say that one thousand dollars that even though it's only a pilot program, I'm gonna bet that gets extended. You've got both sides that when I say both sides, Democrats and Republicans, that are gonna have reasons for extending it. It's on one hand, it's a very progressive program. Yeah. Everybody gets the same one thousand dollars no matter whether you are the highest of income or the lowest of incomes. It's very progressive. So on that side, it has some support from typical typically left centered, left focused individuals. On the other hand, this was created by the President Trump, the Trump administration. Republicans passed it under the One Big Beautiful Bill Act. It's their initiative. They're going to want to see that extended too. So and you don't want to be the president or the congressperson that took away the one thousand dollars from No. No. I think I would go one step further. I think that one thousand dollars will probably have some kind of inflation factor or probably go up over time. Yeah. It's gonna be very popular. I think these will be something that's gonna stick around for a long time. And whatever you wanna call them, like we said, whether you wanna call them five thirty a accounts or Trump accounts, they're another tool in the planning, another arrow in the planning quiver, something to think about. All right. Well, that'll do it for this very special episode of The Great Retirement Debate. Ed, thanks so much. And make sure to check out season five of the great retirement debate, which will be dropping very soon. And check out those Trump accounts live here in just a few weeks. Alright. With that, I wanna thank you and remind you, the great retirement debate is meant to illustrate both sides of the coin to give you an unbiased look so that you can make better decisions. Ed and I are firm believers that more informed individuals make better decisions. Better decisions lead to better outcomes, and that's what we're all about for you. So thanks so much for joining us here at the Great Retirement Debate, and we'll see you real soon.