Trump Accounts Are a Great Start, But They Could Be Better
Trump accounts are a sound enough idea, except that future withdrawals will be taxable. One solution would be to give them a Roth-style tax-free structure. Here's how it could work.
One of the biggest challenges facing younger generations today is preparing for retirement in an increasingly uncertain world. Encouraging Americans to begin saving and investing early is one of the most effective ways to build long-term financial security.
One proposal that has recently generated discussion is the concept of the "Trump account." The idea behind the account is simple but powerful: Provide young Americans with an investment account early in life so they can benefit from decades of compounded growth before retirement.
Encouraging Americans to begin saving early is a strong step in the right direction. However, there may be an opportunity to improve the concept even further by adopting a model that takes advantage of the tax-free power of a Roth-style retirement account.
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What is a Trump account?
A Trump account is designed as a government-supported investment account for young Americans, created with the purpose of encouraging long-term wealth accumulation starting at birth or early childhood.
Under the proposal, a child would receive an initial contribution from the government or another source to start the account. Family members could then continue contributing additional funds each year as the child grows up. These funds would be invested and allowed to grow over time.
Once the individual reaches adulthood, the account would typically transition into a traditional retirement savings structure, often through a rollover into an IRA.
The ultimate objective is to help young Americans begin saving for retirement decades before they would normally start contributing to a retirement account.
How Trump accounts work
Under the proposed structure, a Trump account would be a special investment account created for children under the age of 18. The rules are designed so the account functions primarily as a long-term savings vehicle rather than a general spending account.
One of the most notable features of the program is a proposed $1,000 starter contribution for children born between 2025 and 2028. This initial deposit is intended to jump-start savings and demonstrate the potential benefits of long-term investing.
In addition to the government contribution, parents, relatives or other individuals may contribute up to $5,000 per year per child, with the limit expected to be indexed for inflation. In some cases, employers may also contribute up to $2,500 annually, which counts toward the overall contribution limit.
During the child's early years, the funds would generally be invested in diversified U.S. stock index funds designed to encourage long-term investing and reduce speculative risk.
Trump accounts are structured as tax-deferred investment accounts, meaning investment gains grow without being taxed each year. However, because the account would eventually transition into a traditional retirement account structure, withdrawals later in life would generally be taxed as ordinary income.
The power of compounding
One of the most compelling aspects of the Trump account concept is the potential impact of long-term compounding.
Consider a simple example. Suppose a child receives a $1,000 initial contribution and family members contribute $3,000 each year until the child turns 18. Assuming an average annual return of 8%, the account could grow to roughly $110,000 by age 18.
If that balance were simply left invested and continued compounding at the same rate without any additional contributions, it could grow to nearly $3 million by age 60.
These kinds of long investment timelines demonstrate how even relatively modest contributions made early in life can grow into significant retirement wealth.
A potentially better structure: The Roth IRA model
While Trump accounts represent a promising idea, there is another retirement structure that could offer even greater long-term benefits: The Roth IRA.
A Roth IRA operates under a different tax model than traditional retirement accounts. Contributions are made with after-tax dollars, but once the money is inside the account, investment growth is tax-free and qualified withdrawals are also tax-free.
If the account owner waits until age 59½ and the account has been open at least five years, all distributions, including investment gains, can be withdrawn without paying any taxes.
This structure can be particularly powerful when investments have decades to grow.
Why Roth accounts could be even more powerful
If a Roth-style structure were used for early-life investing, the long-term benefits could be substantial.
Under the Trump account structure, withdrawals in retirement would generally be taxed as ordinary income. Under a Roth model, however, the millions of dollars generated through decades of compounded growth could potentially be withdrawn completely tax-free.
Roth accounts also offer greater flexibility. Investors can typically choose from a wide range of investment options, including stocks, exchange-traded funds and mutual funds.
In addition, Roth contributions can generally be withdrawn tax- and penalty-free if needed because the original contributions were already taxed.
This flexibility can be valuable for major life events such as purchasing a home, covering education expenses or handling financial emergencies.
A simple policy improvement
The primary reason Roth IRAs are not commonly used for young children is the earned income requirement. In order to contribute to a Roth IRA, an individual must have earned income. Most children and teenagers do not meet this requirement, which limits the ability to begin investing very early in life.
One potential improvement would be to allow Roth-style retirement contributions for individuals between ages one and 18 without requiring earned income. Such a policy could include higher annual contribution limits, eliminate the earned income requirement for minors and simply transition into standard Roth IRA rules once the individual reaches adulthood.
This approach would allow young Americans to benefit from tax-free retirement wealth while still encouraging early saving and investing.
Final thoughts
The Trump account concept represents a meaningful step toward improving financial security for future generations. By encouraging young Americans to begin investing early, the program highlights the extraordinary power of long-term compounding and reinforces the importance of retirement planning.
However, the concept could potentially be strengthened even further by adopting a Roth-style structure that allows long-term investment growth to be withdrawn completely tax-free.
Whether through Trump accounts, Roth IRAs or a hybrid approach that incorporates elements of both, the underlying lesson remains the same: Starting to invest early and allowing compounding returns to work over time is one of the most powerful ways to build long-term wealth.
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