By Rick Waechter, Founder

Trump accounts just launched. They are investment accounts for kids under 18, designed to be used in retirement. They have tax benefits and rules like those for individual retirement accounts (IRAs) – essentially, tax-deferred growth, with tax due when you withdraw money from the account.

The accounts are promoted as an opportunity to save tax-deferred for a child, contributing up to $5,000 annually until age 18. There is no tax deduction when you contribute, unlike a typical company retirement plan.

For most people, there is only one real benefit: a $1,000 gift from the government when an account is opened for any child born between 2025 and 2028.

If you have a child, grandchild, relative or friend who qualifies, the link to open an account, and get the $1,000, is here: https://www.trumpaccounts.gov/.

I don’t want to disparage a gift of $1,000. It’s certainly worth opening an account to get the money. And the stated goal – encouraging people to save for retirement – is worthy. But for most people, it probably doesn’t make sense to put any of their own money into the account. Here’s why:

• 529 accounts are better to save for college, because there is no tax when the money comes out if used for higher ed.
• Roth IRAs are better once the child has earned income, because Roth accounts are tax-free for life, including when the money is withdrawn.
• UTMA (custodial) accounts are more flexible if you need the money before age 59 ½, because there are no penalties. In addition, appreciation is taxed at capital gains rates, which are lower than ordinary income rates.
• Irrevocable trusts are better if you have a very high net worth and your goal is to move significant assets out of your estate. They work especially well if you can fund the trust several decades before your death, because you will have moved decades of potential appreciation out of your estate.

Maybe most troubling: I suspect Trump accounts will become tax-disadvantaged accounts for too many people. Two reasons:

• The beneficiary can access the money at age 18. That’s not the intent. But I expect many will. When they do, the money comes out with a 10% penalty and tax on growth at ordinary income tax rates. Those rates are higher than if you had sold stock in an ordinary brokerage, creating capital gains.
• Normally, when you put after-tax money into a retirement account, only gain is taxable on withdrawal, since the contribution didn’t create a tax deduction. But to avoid paying tax on the money contributed, you must keep track of the basis (amount contributed) through an annual IRS tax filing. The likelihood that someone will make that annual filing for years, or decades, is ridiculously low. The likelihood they will even remember that a portion of a withdrawal should be tax-free is equally low. Many people will inadvertently pay tax when they take money out on contributions which went in without a tax benefit. The only winner: the IRS.

The lesson: when someone offers you a freebie (in this case, $1,000), take it. But don’t let that influence you to do something else (in this case, contributing your own money to a Trump account) which probably makes little sense.