'Trump accounts' are great - if you're already rich

Roth accounts are included in the value of your estate for estate-tax purposes. A previous version of this article misstated the tax treatment. By Brett Arends

They're a poor deal for most other people

The new "Trump accounts" are great long-term tax shelters for the children of high earners.

Open a "Trump account" for each of your children and contribute the $5,000 maximum every year - but only if your child will not need to tap into the savings when they turn 18.

For lucky children in this situation, Trump accounts offer an extraordinary tax shelter potentially worth millions of dollars in retirement, and even more in estate taxes. Such children can roll over their Trump account to a tax-free Roth IRA as soon as they turn 18. They will pay income tax on any investment gains transferred to the Roth - but thereafter, the money will compound for decades tax-free. If they don't touch the money until they die, they can probably leave it to their heirs without paying much, if any, estate tax either: The federal allowance on estate taxes is now up to $30 million for a couple, and will rise in future years in line with inflation.

Most of the children who will benefit from this will come from high-earning families, where at age 18 they won't need to cash in the account because they will have other sources of money.

For everyone else, Trump accounts offer few if any benefits, financial planners agree. These accounts may actually cost the children more in taxes than a regular taxable brokerage account, such as the ones at Vanguard or Fidelity.

There is some benefit if the children are eligible for "free" seed money, such as from taxpayers or from billionaires, charities and employers. In those cases, families should open Trump accounts to get the free money and, if needed, make contributions to qualify for any matching dollars.

But they shouldn't contribute another nickel beyond that.

"For kids that will qualify for free government money, or for one of the gifts from Ray Dalio, the Dells, Nicki Minaj, etc.: Absolutely, go for it - take the free funds, invest them and let them grow," says Rachel Elson, a financial adviser at Perigon Wealth in San Francisco.

"It's hard to beat free money, so I'm generally inclined to accept any third-party contributions into Trump accounts that a child may be eligible for," agrees Zach Reyes, a financial planner at Circadia Financial Planning in San Angelo, Texas. "I'm less confident about using them as the primary vehicle for saving for a child beyond that."

When your child withdraws the money from the Trump account, all investment gains will be taxed at income-tax rates. If they had invested the money instead in a regular taxable brokerage account, they would be taxed instead at long-term capital-gains tax rates, which are usually lower.

"From a pure tax-efficiency standpoint, a taxable brokerage account may produce a better outcome because long-term capital gains are generally taxed more favorably than ordinary income," says Jamie Bosse, a financial adviser at CGN Advisors in Manhattan, Kan.

"I've told clients not to prioritize a Trump account over a taxable brokerage account for a child who'll spend the money at 18," says Jeff Judge, a financial planner at Chesapeake Financial Planners in Forest Hills, Md. "A plain taxable account holding the same index fund gets capital-gains rates instead, and for an 18-year-old with little other income, a chunk of that often lands in the 0% bracket."

If your child wants to withdraw the money to spend on something other than so-called qualifying expenses, such as college or a home down payment, they will also need to pay an extra 10% penalty.

So those children who need the money for general living expenses will be hit hardest. Most of those children will be from low-income families with fewer resources.

In other words, it works out pretty much as a regressive welfare program. The richer you are, the better the deal. The more you need the money, the less you get.

Trump accounts must be invested in the S&P 500 SPX. There are some plans to expand the options in future, though not by much. Since the 1920s, the large-cap U.S. stock index has earned average returns of 7% a year plus inflation. Wall Street typically expects that to continue. Let's use that for our calculations, even though many argue future returns will be lower.

Contribute $5,000 a year to a Trump account that on average earns 7% a year (ignoring inflation), and by age 18 the account will be worth $185,000 in today's money. Just over half that figure will be from investment gains.

Using today's tax rates, and assuming (for simplicity) that your child has no other taxable income, withdrawing this money from a Trump account would trigger $11,200 in federal income taxes.

If they had made the same money in a taxable brokerage account instead, the capital-gains tax would be just $3,700, or less than a third as much.

These figures are purely illustrative. Inflation, investment returns and changes to tax rates will all affect the actual outcome.

In the brokerage account, the investment choices would be wider too, and there would be no 10% penalty to spend the money on living expenses. There would be some tax on dividend income each year from the stock fund, but it would be minimal. U.S. companies pay very low dividends.

But if your 18-year-old doesn't need the money, they can roll the amount - in this illustration, about $174,000 in today's dollars, net of taxes - over to a Roth IRA. This is an incredible start to their adult life; most working people take years of toil to get to that level.

Using the same financial assumptions, if they leave this money in the Roth until age 65, it would grow to about $4.2 million in today's money. And withdrawals, including of all the investment gains, would be completely free of any taxes.

And if they leave it there until they die at, say, age 85, it would be worth $16.2 million - again, in today's money.

While Trump accounts typically make little or no sense for children who will withdraw the money at 18, "for families who won't touch the money until retirement age, the math flips completely in the account's favor," according to Judge.

"For upper-middle-class families whose kids won't touch the money, it's a real tax-free growth engine," says Matt Chancey, a financial planner and founder of Tax Alpha Companies in Winter Park, Fla.

As for the so-called free money? Yes, the $1,000 from the taxpayers is nice to have. But using the same assumptions above, it would grow to just $3,400 in today's money by the time they turn 18. It's not life changing.

Also, the $1,000 from taxpayers is only available to children born during calendar years 2025 through 2028 - roughly during the Trump administration. In other words, you pretty much need to be a "Trump baby" to get the "Trump bonus" to your "Trump account."

If you open the account online while flying to Palm Beach, Fla., you will then land at Donald J. Trump International Airport.

-Brett Arends

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