Trump accounts create legal backdoor for Roth IRA

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For some, claiming the initial grants — worth up to $1,000 — is the draw. But even kids who aren’t eligible for the “free money” can leverage the accounts with a strategy typically used by older investors to kickstart future tax-free growth.

Trump Accounts, also known as 530A accounts, are a new type of tax-advantaged savings and investment account for kids — and, based on the way they’re structured, offer a way for these young investors to build savings in a Roth individual retirement account, according to financial planners.

Roth IRAs are powerful savings vehicles in which investment growth and future withdrawals in retirement are generally tax-free, with some exceptions, experts said.

Currently, someone can contribute to a Roth IRA only if they earn wages, a salary or other income — generally barring children from holding the accounts.

Trump Accounts will offer another pathway, experts said. And the ability to get started at a younger age gives funds more time to grow, leveraging the power of compounding.

“Trump Accounts create a legal backdoor into a Roth IRA that does not require a child to have earned income, something that was simply not possible before,” said Adam Bergman, founder of IRA Financial and a tax attorney based in Miami.

“Right now, traditional and Roth IRAs are locked away from most minors because they strictly require documented earned income,” Bergman said. This is “a meaningful expansion families are not hearing about,” he said.

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The accounts, which officially launch on July 4, will likely contain a mix of pretax and after-tax dollars and carry various rules around contributions. Among them:

Parents, guardians, grandparents and others will be able to contribute up to $5,000 a year in after-tax dollars up until the year before the beneficiary turns 18. These contributions are tax-free when withdrawn.
Employers can also contribute up to $2,500 per worker per year, which is part of the $5,000 limit and won’t count as taxable income, according to the IRS.
Qualifying charitable organizations and state and local governments may also make contributions, and those do not count toward the $5,000 annual limit.
The Treasury Department’s $1,000 seed money and any charitable gifts go into the account before taxes are paid. Those pretax funds will be subject to ordinary income taxes upon withdrawal, according to the Treasury guidance. The same tax treatment applies to employer matches of up to $2,500 per employee, and state and local contributions.

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