Newborns might be eager for the new Trump account launching in the coming year, but experts caution that it could create tax complications for those looking to contribute—parents, grandparents, friends, and more.
The Trump Account is a savings initiative aimed at helping families accumulate wealth for various future expenses. Starting in July, every child born between 2025 and 2028 who has a Social Security number will receive a $1,000 boost to their account, thanks to a recently passed tax and spending bill. Additional contributions up to $5,000 annually can be made by parents and others, while employers can pitch in half of that amount until the child turns 18.
However, individual gifts won’t qualify for the annual gift tax exclusion, meaning donors will have to file a gift tax return (Form 709) for any contribution, whether it’s the minimum of $25 or the full $5,000, as specialists pointed out. Amber Waldman from RSM noted that while this may seem trivial, many may be surprised to find that Form 709 isn’t often offered on DIY tax software like TurboTax, likely necessitating help from an accountant.
She emphasized that this is a “significant tax compliance issue.”
Why do I need to file Form 709?
Contributions to the Trump account are classified as gifts without “current interest,” meaning they’re not eligible for the $19,000 annual gift tax limit per person. “Current interest” gifts are those that the recipient can utilize immediately, but funds in this account are typically locked until the child reaches 18.
Interestingly, 529 education savings plans are exempt due to explicit Congressional stipulations when they were established, which clarified that such gifts are treated as complete gifts to the beneficiary, rather than future interests.
Waldman stated that this isn’t something the IRS or Treasury can sort out administratively; it requires Congressional action, and currently, no legislative proposals are on the table.
She also warned that not filing, even if no taxes are owed, can pose a risk, as the IRS may take note during an audit.
How do Americans file Form 709?
Individuals can file Form 709 in various ways: they can print, fill out, and mail the form, or submit it electronically through an authorized provider or the IRS’s modernized electronic filing system.
If someone decides to hire an accountant, Waldman cautioned that fees may exceed the amount donated.
Some have even called this situation a “gifting trap tied to Trump’s account.”
Does Trump’s account still have value?
Most financial advisors suggest it does. “It’s tough to pass up free money,” remarked Dan White, CEO of Daniel A. White & Associates. He mentioned that if someone offers you money, don’t scrutinize it too closely.
Despite the initial $1,000 from the government, experts advise that individuals consider the full spectrum of their savings options when it comes to donations.
For some, Trump’s account seems rather impractical. For instance, one expert pointed out that the need for Form 709 and the fact that donations are not tax-deductible while withdrawals are taxed make it less appealing. Withdrawals made before age 59 and a half may even incur a 10% penalty.
“If your child happens to earn an income, a Roth IRA is a great alternative since it’s tax-free,” they suggested. “For educational savings, a 529 plan might be more advantageous, as qualified distributions won’t be taxed, and some states also allow for tax-deductible contributions.” Roth IRAs require after-tax contributions, but withdrawals aren’t taxed.
Lastly, funds in the Trump account must be allocated to low-cost index funds, capped at fees of 0.1% or lower, mostly focusing on U.S. stocks.
According to data from the Investment Company Research Institute, average fees in 2024 were around 0.4% for stock mutual funds and 0.14% for index stock ETFs.
