As the leaves turn and October begins, taxpayers should start thinking about maximizing their tax-advantaged investments. Among the many changes brought about by the One Big Beautiful Bill Act is the introduction of 530A accounts, also known as "Trump Accounts."
What is a 530A account?
In short, a 530A account is a tax-deferred custodial investment account for children under 18. "Tax-deferred" = pay taxes later, not now. "Custodial" = you manage the account on behalf of your child/dependent until they reach legal age. Contributions are made after-tax, up to $5,000 per year per child, and the growth is tax-deferred until withdrawals are made. Once the child reaches 18 years old, ownership of the account automatically transfers from the custodian to the child at which point it is treated substantially like a Traditional IRA (more on that below).
Who is eligible? And what's the free $1000 I'm hearing about?
This is a common point of confusion. Any child under the age of 18 with a Social Security number is eligible to open a 530A account. Each child may have only one account opened in their name. Only children born in calendar years 2025-2028 are eligible to receive $1,000 in seed money from the IRS to begin funding the account, and custodians (that's you) must complete Form 4547 (get it?) to apply for the seed money.
Who can contribute?
In short, almost anyone. Total contributions are limited to $5,000 per year per account, but those contributions can come from family members, friends, businesses, religious groups, charities, etc. Some companies have also begun matching programs, similar to 401(k) matching, so it could be worth asking if your employer offers this benefit.
What are the potential tax advantages and implications?
This is another common area of confusion. None of the money involved in the account is ever tax-free, but much of it is tax-deferred, which can offer advantages if the marginal tax rate at withdrawal is lower than the marginal tax rate at contribution. Individual contributions are after-tax, and growth within the account is tax-deferred until withdrawal. All withdrawals are treated pro rata across the basis (individual contributions only, on which tax has already been paid) and the untaxed portions (IRS seed money, employer matches, and growth), which are all taxable at ordinary income rates upon withdrawal.
What are the potential disadvantages?
Like any tax-advantaged account, the potential tax savings and/or tax deferment comes at the cost of limited flexibility regarding fund access and use.
- No hardship withdrawals are permitted before the age of 18, including medical and financial emergencies. This money is truly locked down.
- After the age of 18, the account is substantially similar to a Traditional IRA in that withdrawals before the age of 59-1/2 are subject to a 10% penalty on the taxable portion. However, exceptions exist for qualified education expenses, first-time home purchases (up to $10,000), and expenses related to birth or adoption.
- Also like a Traditional IRA, required minimum distributions (RMDs) begin at age 75 (for individuals born after 1960, and with some technical details that I won't get into here).
Qualitatively, there may be other considerations. I am not a financial advisor, but industry reporting suggests that investment options within 530A accounts are relatively limited compared to a typical 401(k) or IRA. This may be due to the relative newness of the 530A accounts or it may be a permanent feature. Also, you may or may not be comfortable with your just-turned-18-year-old suddenly having unrestricted access to a potentially substantial amount of money... I'm not sure any of us would've made the optimal long-term decisions at that age!
How much money are we talking about here?
Using a historical US stock market average of 10% CAGR, a $5000 annual contribution starting at birth until age 18 would forecast to be ~$250k. That same $250k forecasts to $12.4MM at age 59, even without further contributions. However, recall from above that the vast majority of that money would be taxable upon withdrawal. And of course, the real magic here is time and compound growth, which can be achieved in any account with the right mix of investments, and any investment is subject to swings in value... I'm just using historical averages.
So are 530A accounts right for my family?
If your child is eligible for the $1,000 in seed money or if your employer offers a free matching program, then I'd absolutely sign up. There's hardly ever a reason to decline free money. However, if you don't qualify for free money, I'd typically recommend alternative pathways first to achieve similar, and often better, tax outcomes for families with children.
529 Plans have higher contribution limits and the growth is tax-free (not tax-deferred) if used on qualified education expenses. Additionally, funds can be used to pay for K-12 tuition, so they're not fully locked down, and up to $35k in excess funds can be rolled over into a Roth IRA, with certain limitations.
Custodial Roth IRAs can be a good option if you have older kids with some earned income (baby sitting, lawn mowing, part-time jobs, etc). Annual contributions are capped at the lesser of $7,500 or the child's income, and contributions (but not earnings) can be withdrawn at any time without penalty. Roth IRAs also have more flexibility in retirement regarding RMDs and some other provisions than Traditional IRAs since the taxes have already been paid.
UTMA/UGMA Custodial Accounts have no contribution caps other than standard gift-tax rules, and there is no earned income requirement for the child, so you can open an account even for very young children. The growth is taxable at capital gains rates, which have historically been less than ordinary income rates, and use of funds is completely unrestricted. The child becomes the owner of the account at age 18 or 21, depending on your state.
Dependent Care FSAs, though substantially different vehicles than everything above, are an easy way to achieve tax savings on daycare/camp/tuition expenses for familiies with children under age 13. These are use-it-or-lose-it accounts, not long-term investments, but they may offer some tax advantages depending on your situation.
If you're already maximizing the alternatives above, or if you've decided 530A accounts are definitely for you, the sign up process can be initiated HERE. If you like to discuss any of this further, I am always available to talk. Reply to this email, schedule a meeting, or call/text me at 773-969-7469.
Information is current as of the publication date. Tax laws change, so verify before taking actions based on this content. This post is intended as general information, not specific tax advice, and does not create a client relationship with BeaneCounters.
