Trump Accounts create a 'legal backdoor' for Roth IRA wealth, tax attorney says

Families have signed up nearly 6 million children for Trump Accounts, set to launch next month.

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. 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.

Trump Accounts mostly function like an individual retirement account, with some exceptions, and can receive contributions from family, friends or employers.

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 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 These contributions are tax-free when withdrawn.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.

Funds in Trump Accounts grow tax-deferred.

When the child turns 18, the standard rules for traditional IRAs apply. Withdrawals before age 59½ are generally subject to income taxes and a 10% penalty. There are certain penalty exceptions, including for the down payment on a home or education expenses.

Financial advisors generally recommend that families who qualify for the initial $1,000 deposit from the Department of the Treasury open a Trump Account and let the money compound over time.

Beyond getting the "free money," it may not make financial sense to contribute to a Trump Account in lieu of other types of financial accounts parents might open for their children, said Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis.

That's especially true if the Trump Account isn't meant for a child's future retirement savings, he said.

"They generally should be thought of as retirement accounts first, and not for other purposes," said Levine, the chief planning officer at Focus Partners Wealth.

For example, if the money is largely earmarked for higher education, 529 college savings plans "have a clear advantage in almost all circumstances," Levine said. Savings in a 529 plan grow tax-free, and withdrawals for qualified expenses are also tax-free. 

There could be another reason to consider Trump Accounts: for the Roth individual retirement account conversion.

The strategy would entail the transfer of pretax or nondeductible IRA funds held in the Trump Account — including the seed money, employer matches and philanthropic gifts — to a Roth IRA. The trade-off is that the child would owe income taxes to convert those funds to Roth savings.

However, the tax bill on the Roth conversion would likely be relatively low if done at the right time, according to financial planners.

That timing is probably early in the account beneficiary's career — roughly between ages 18 and their mid-20s, depending on the child's personal circumstances — when their income and tax rate would almost certainly be lower than in later life, financial planners said.

That would allow the funds to grow tax-free in a Roth account thereafter, said Ben Henry-Moreland, a CFP with advisor platform Kitces.com.

"It has the potential of growing to a huge pot of tax-free funds at retirement," he said.

Depending on the size of the Roth conversion, the child may not owe any federal income taxes, as long as the taxable portion is less than the amount of the standard deduction, Bergman said. In 2026, the standard deduction is $16,100 for single taxpayers.

However, the Roth conversion strategy could backfire due to a big caveat: the so-called "kiddie tax" rules.

This is "the largest technical risk" to executing the Roth conversion strategy, said Cary Sinnett, the senior manager of personal financial planning at the Association of International Certified Professional Accountants.

The so-called "kiddie tax" is an extra levy once a child's unearned income — such as that from a Roth conversion — exceeds a certain threshold. That threshold is currently $2,700.

These tax rules can prove financially significant, especially for high-earning households, according to financial planners. If done incorrectly, the tax on the Roth conversion may end up being paid based on the parents' marginal income tax rate, which is as high as 37% on the federal side, rather than the child's.

"It'll have a huge economic impact they don't expect," Sinnett said.

Kiddie-tax rules can be somewhat complicated.

In general, the kiddie tax always applies to children with unearned income under age 18.

It may apply in certain cases between the ages of 18 and 24. For example, if the child is still a dependent on their parents' tax return, or is a student who is supported by their parents, unearned income, including Roth conversions over $2,700, would be taxed at their parents' tax rate, Henry-Moreland said.

"You really do have to be careful about when that conversion happens," Sinnett said. "The safest way to stay out of it is to make sure [the child] is over age 24, because then it's not even a question."

The other factor is how to cover the taxes on the converted balance, Henry-Moreland said.

"If the owner doesn't have enough funds from outside the account, or their parents aren't willing to pay it for them, they'll need to pull funds from the account to pay the tax — which will itself be treated as a taxable distribution," he said. In that case, there would be a 10% early distribution penalty.

That would leave less in the account to continue to compound tax-free, making the conversion a less attractive long-term strategy, Henry-Moreland said.

Parents might also consider making a tax-free gift to their children to help cover the taxes if they can't pay it themselves, according to financial planners. The annual gift exclusion in 2026 is $19,000, a sum that is indexed to inflation.

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