Here’s a summary article, a more detailed wiki, and a discussion thread. Let’s consolidate the discussion here now that they’re available
https://www.bogleheads.org/wiki/Trump_account
https://www.bogleheads.org/forum/viewtopic.php?t=471780
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This is an automatically-generated Wiki post for this new topic. Any member can edit this post and use it as a summary of the topic’s highlights.
To summarize:
It seems like there are a few reasons to contribute beyond the government & non-profit seed:
- If your employer makes or allows you to make pre-tax contributions.
- To transfer your money to the child and effectively “hide” it from FAFSA, since the child’s IRA is currently excluded, assuming the same exclusion is extended to the Trump Account (credit to glitch99).
- If you are certain that your child will be able to save on taxes with Roth conversions.
Under any other circumstances it seems like a custodial account is better.
I am slightly confused about this quote from the BH wiki:
Wouldn’t the first $2700/yr (+ inflation adjusted) be tax free for ages 18-23? Is it not mentioned because it’s such a small amount or am I misunderstanding how kiddie tax works?
My take is Trump accounts are opening up IRAs to children by eliminating the earned income requirement for contributions. Deciding to contribute to a trump account is no different than deciding to contribute to a traditional IRA (besides the fact you are making the decision for your kid instead of for yourself).
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This all sounds like the decision is about what’s best for me and my money, using my kids to leverage my options. It’s not intended to be a tool for my benefit, it’s a tool for my kid’s benefit.
A custodial account producing better results is the same as claiming that a taxable brokerage account is better than an IRA. Virtually no one ever claims that. Pretty much any other time, a 5 year old having the ability to fund a $5k IRA would be considered a no brainer. Parents are routinely encouraged to fund their teenager’s IRA once the teen starts working. Trump accounts are about better enabling this common advice, I don’t know why the reaction is instead to change that advice?
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It’s a little different, because the contributions are after-tax if your employer doesn’t provide it as a pre-tax benefit.
I think you are omitting what and why is a “no brainer” and routinely encouraged. The only reason I know for this is the tax advantages. Most advice I’ve seen suggests to fund a Roth IRA. A tax-deductible Traditional IRA may make sense if the tax savings are significant enough.
The Trump Account does not offer any tax advantages from what I see, other than the potential ability to convert to Roth during low-income years.
I don’t think this analogy is correct. It would be correct to say that a custodial account producing better results is the same as claiming that a taxable brokerage account is better than an after-tax Traditional IRA. Because the end result is the same – both are taxable exactly the same, but the brokerage doesn’t have any restrictions of the IRA.
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It isnt “your” IRA, it’s your kids’. I dont get a tax deduction contributing to your IRA. Why would you expect to get a tax deduction for contributing to someone else’s IRA?
As I said, this reads as a what’s-best-for-me breakdown, when it isnt for you.
It’s tax deferred, like a traditional IRA.
A taxable brokerage is taxed every year. An IRA is tax deferred. It’s not close to being the same.
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This is a buy-and-hold type of investment. Only dividends would be taxed every year in a taxable brokerage. The S&P500 and VTI both currently yield 1%. And in a custodial account I think it would be taxed at the child’s tax rate, and if there’s no other income it’d be tax free on the first ~$250K invested. It’s basically the same.
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Now you’ve switched from the accounts, to arguing investments. Two different discussions.
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It isn’t really two different discussions.
The only benefit of a non-deductible traditional IRA is deferring taxes (i.e. allows you to trade freely, more-or-less, or have other investment types that would have ordinary income tax rates in a regular brokerage account).
The downside of the non-deductible traditional IRA – is that you have traded deferring taxes for a guaranteed application of “ordinary income tax” rates.
By comparison - a brokerage account requires you to handle the taxes annually - but has preferred tax rates for long-term capital gains and qualified dividends (up to a very high annual ceiling, by most people’s standards). And if you are not trading, and only have non-dividend-paying investments, you can still effectively defer the taxes. (and in a practical sense - with ETFs - the dividends are a relatively small portion of fund growth - so you are at least deferring MOST of the taxes)
When people talk about wanting to stuff money into a kids IRA – it is almost universally related to Roth IRAs (where no further taxes are ever paid) versus a nondeductible IRA (which acts as a “guaranteed worse than Roth” tax deferral).
That said - there are probably some interesting strategies to use the new accounts to roll-over a Roth for kids when they turn 18. But from the math I have seen, it is questionable when you start having to deal with kiddie-tax handling on the conversion if the adult-child is still a dependent (i.e. going to college).
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Did you read this:
This is a tax benefit to me for contributing to someone else’s IRA. What are you asking? I didn’t come up with this, I’m only working with the information at hand.
After the initial seed money, the Trump Account is literally about transferring money from parents to children. There are many ways to transfer money to children, and this one appears to be least efficient, except in the three cases I mentioned.
The only difference I realize now is that at 18, all else being equal, the child would either have $X in a taxable account (say from the after-tax custodial brokerage) or some fraction of $X in the TA → Traditional IRA. From that point forward, the tax deferral nature of the IRA may have some advantages, which needs to be weighed against the disadvantages of IRA restrictions.