Hey, guys. Mike Frontera here. Back with another retirement theory video.
So imagine opening up a retirement account for your brand new grandbaby. They just got home from the hospital, and they're already saving for retirement. They don't have a job. They don't have any earned income. They don't even have teeth.
And yet there it is. Money getting socked away for them, ready to enjoy decades of tax advantaged growth.
sound too good to be true, right? Well, thanks to a new account type created by the One Big Beautiful Bill act. That fantasy will become a reality on July 4th, 2026, just in time for the semi quincentennial semiquincentennial. I love that word. They're called Trump accounts. And today I'm going to go through how they work, who they're used for, and how a strategic Roth conversion program can turn modest contributions into a tax free fortune for your kid.
now, if you're a regular viewer of these videos, you know I love Roth IRAs, tax free growth and tax free withdrawals. What could be better?
And I get it all the time. People want to set up Roth IRAs for their kids. But here's the thing. Under normal IRS rules, you cannot fund a IRA or a Roth IRA for your children if they do not have earned income. So unless little Tommy is mowing lawns and getting a paycheck, there's no IRA for him.
So Trump accounts blow that door wide open. There is no income requirement. None. As long as the child has a social security number and a birth date, they can open a Trump account. In that feature of not needing earned income, along with what I'm going to show you in a minute, is what makes these accounts so exciting.
What Is a Trump Account?
A Trump account is a brand new type of traditional IRAs, specifically created for children under the age of 18. You can think of it as like a custodial retirement account that the parent takes care of, but it is strictly for the child's benefit. The money is owned by the child and grows tax deferred, meaning no taxes on interest, capital gains or dividends, all while the account is growing.
Then, once the child turns 18, the account automatically converts to a traditional IRA and follows all the basic traditional IRA rules that we know and love.
and there are no income limits on the parents or grandparents either. Which is nice, because a lot of things these days are dealing with income phase out, so we don't have to worry about that.
And there's an extra sweetener, a $1,000 straight from Uncle Sam. for U.S. citizens born between January 1st, 2025 and December 31st of 2028, the US government will deposit $1,000 into the account as seed money. And that's free money. Whether you enthusiastically voted for Trump or not.
Now, if your child or grandchild was born outside of that window, they are still eligible to set up a Trump account. They just don't get that thousand dollars of seed money.
Private Contributions and Bonus Seed Money
But wait, there's more. Because believe it or not, the federal government is not the only one who is providing free money. for kids who were born before 2025, who are not yet 18. They can still benefit from a program that a couple of generous billionaires have already set up.
biggest one so far is from the Michael and Susan Dell Foundation. Yes, Dell of the computer fame. They pledged $6.25 billion to provide $250 per account for up to 25 million kids who are ages ten or under.
here's how they qualify. You have to be ages ten or under. Born before January 1st of 2025. Essentially, they didn't get the thousand dollars seed money and then finally they have to live in a zip code where the median household income is $150,000 a year or less.
And that last piece is a key one. It is tied to your zip code that you live in. There's no financial requirements. There's no, aid forms to fill out or anything like that. According to Invest America, who is the nonprofit who is administering this benefit, 75% of ZIP codes in the US will qualify, which covers about 80% of potential eligible kids. as long as your zip codes median household income is under $150,000, you qualify. And the best part is you don't even have to apply. Eligibility is automatically verified based on the child's age and zip code. The money just shows up in the account.
In the Dells aren't the only one. Dalio Philanthropies, which is Ray Dalio. The hedge fund guy, is giving $250 to every eligible child in the state of Connecticut.
And there's more than that. Check this out. Invest america.org again, that's the nonprofit who is partnering with the Treasury to administer these donations. They've already got a zip code lookup tool where you can punch in your zip and instantly see whether your child qualifies for that Dell $250. And check out all these other contributors.
By the way, one catch that you may have missed there, the Dell pledge is funded for the first 25 million eligible kids whose accounts get activated. it's a first come, first serve kind of thing.
Who Can Contribute?
And the cool thing is, anyone can contribute parents, grandparents, aunts, uncles, employers and charitable organizations. The annual limit is $5,000 per child, and that will get indexed for inflation starting in 2027.
that there's a few important notes on the tax side. And pay close attention, because it will impact what we're going to be talking about in a minute with this Roth conversion strategy.
Contributions from individuals mom, dad, grandma and uncle. Those are made after tax. So there's no deduction to get that money in there. That's not necessarily a bad thing. And again I'll talk about that in a minute.
Now contributions from employers or the government or these charitable organizations, those will all come in as pretax contributions. Meaning the child will have to pay tax on that money when it's withdrawn later. And again, all the growth is tax deferred until withdrawn.
And again, what's really unique here is that unlike an IRA and a Roth IRA, the child does not need to have earned income in order to have contributions made. If they do have earned income, they can still have money put into their Trump account and fund an IRA or Roth. Just participating in one does not preclude the other.
Employer Contributions
And by the way, you may have noticed before I said employer contributions. Yes, your employer can get in on the fun too.
here's the basic deal starting July 4th, 2026, the Semiquincentennial, employers can put in up to $2,500 per employee toward Trump accounts. And that money can either go into an employee's account if they're under 18 or dependent of the employee if that dependent is under 18.
And a few important little rules here that $2,500 limit again that's per employee not per child. So if you're an employee with ten children, you can still only get the $2,500. And you'd have to spread it out amongst your ten children. And that $2,500 does count toward the $5,000 annual limit. So if your employer puts in 2500, grandma and grandpa can only put in 2500 as well.
For the employee, that contribution is excluded from their income. So it's essentially free money from your paychecks perspective. And for the employer, that contribution comes in as a business expense. Also, the employer has to set up a formal agreement and complete nondiscrimination testing, very much like a dependent care plan. Meaning the employer can't just kick in money for you and not do something for the other employees.
So you might be thinking to yourself, wait a minute, I own a business. Can I contribute to my kid's Trump account and get a business deduction to do so? I like how you think. You sure can.
Now, of course, the cleanest setup would be for your solo workers, your consultants or freelancers. You know, having no employees and your children being the only possible beneficiaries. You know, there's no one else that you'd have to extend the benefit to. You can just put the money into your children's Trump accounts and take the business deduction.
Of course, if you have employees, you can absolutely still do it. you have to factor in the cost of extending that benefit to all employees with eligible children. and either way, you would need to formally adopt a written plan for your business. So in other words, chat it up with your accountant before you start sending the money out.
And one more flavor you may start to see. These plans can be written into a section 125 cafeteria plan. That would be a way for employees to redirect their own paychecks into Trump accounts on a pretax basis.
How Are Trump Accounts Invested?
Okay, so we've got some money that's going into these Trump accounts. Now, what do we do with it? How do we invest it? Well, interestingly, you're not going to have a ton of options, at least not at first.
while the account is in what they call the growth period, which is essentially from birth to age 18, the investment options are very restricted. You can only invest in a low cost mutual fund or ETF that follows a broad U.S based stock index like the S&P 500. The fund must have at least 90% of the underlying stocks as U.S. based stocks. The funds must be exceedingly low cost with expense ratios of 0.1% or less. And there's no leverage allowed.
So no individual stocks, no sector funds, no international stocks, no crypto. Just diversified U.S. stock index funds.
Also, during the growth period, there are no withdrawals allowed. None. I mean, other than very narrow exceptions for rolling money into an able account for a disabled child, that money is pretty much locked up.
When Your Child Turns 18
But once your child turns 18, that Trump account, much like the humble caterpillar, makes its metamorphosis into the butterfly that is a traditional IRA. And at that time, the standard IRA rules will also kick in. Meaning you can invest that money just like you would invest any other IRA account.
and the other IRA rules also apply. So withdrawals before age 59.5, generally subject to the 10% early withdrawal penalty plus ordinary income taxes on the pretax portion and growth on the IRA account. the standard IRA exceptions do apply here though. So first time homebuyer qualified education expenses, certain medical expenses.
The Roth Conversion Strategy — Where It Gets Really Fun
Okay. Now here's where it gets really fun. Once your child turns 18 and that Trump account turns into an IRA, your child will have the option of doing Roth conversions.
Remember those individual contributions that you and Grandma and Grandpa and aunts uncles made throughout the years? Those all went in after tax. And that creates what we call basis in that basis does not get taxed. Again, when you do a Roth conversion. Only the growth plus any pretax contributions like those from the government or your employer are taxed when a conversion is made.
And now think of who's doing those conversions. Someone in their late teens, early 20s, just starting out in the workforce, maybe working part time. In other words, somebody who is probably at the lowest possible income tax bracket that they'll be for the rest of their lives.
Pair that low tax bracket with a standard deduction that in 2026 is already over $16,000. And a lot of those conversions can be done at either zero or near zero tax cost.
Now a quick word of caution here. Try to avoid doing conversions when your child is a full time student under the age of 24. That can trigger something called the kiddy tax, where unearned income is actually taxed at the parent's tax rate, not the child's. The sweet spot is actually usually after college when the child is independent, but typically at a very low income tax bracket.
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A Real-World Example: Jerry, Ginny, and Baby Lilly
So now let's put all of this together in a quick example with our pals Jerry and Ginny and their new grandbaby, Lily. Okay.
Lily is born on January 1st, 2027. Jerry and Ginny set up a Trump account and get their thousand dollars federal seed money, and then they chip in $5,000 per year for the next 18 years. A total of $90,000 in after tax contributions, plus that thousand dollar freebie. I'm going to assume a hypothetical 7% average annual return tracking the S&P 500.
Anyway, by the time Lily turns 18, assuming that 7% hypothetical average growth rate that account would be worth about $185,000, 90,000 of which represents after tax basis for the 18 years of $5,000 contributions from Jerry and Ginny.
Now, Lily graduates college at 22, takes a starter job and over a few years strategically converts a portion of her IRA to Roth. And now each year, she only includes the pro-rated portion of her account that represents growth and that thousand dollars of seed money, the portion that represents her basis. Those contributions get converted over to Roth without any additional tax.
Now let's assume that she gets the entire amount converted over in ten years or so. If it continues to grow at that hypothetical rate of 7% until she's 65, Lily would have over $4 million tax free.
So Jerry and Ginny's $90,000 total outlay has turned into a $4 million tax free fortune for a lily. Now, that's the kind of generational wealth transfer that makes me a little misty eyed.
How to Set Up a Trump Account
So how do we set one of these accounts up? Well, actually, it's pretty simple. Trump accounts officially launch on July 4th, 2026. Also known as the Semiquincentennial. To open one, you can either. File IRS form 4547 either with your tax return or separately. Or probably the easier way is just go to
Now the accounts will first be open through a financial agent that is blessed by the U.S. Treasury. But soon you'll be able to roll them into many popular brokerage platforms like Vanguard, fidelity and Schwab, who have already raised their hand to handle these types of accounts.
Closing Thoughts
So Trump accounts their new, they're unique. And for the right type of family situation can be one of the most powerful wealth building tools that we've seen in a really long time. it's the combination of no earned income requirement. That thousand dollars of free seed money. The after tax basis that's created by contributions. And then ultimately the ability to do a Roth conversion at what could possibly be the child's lowest tax rate ever. It's just it's a combination that simply did not exist in the tax code before this.
And so if you have kids, grandkids or even nieces and nephews that you want to help out, you should give these accounts serious consideration.
So, do you have questions for me? Come visit me at www.retirementtheory.com or send me an email at mike@retirementtheory.com. Once again, thanks for joining me. We'll see you next time.