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KEN HEVERT: Anything you could do to start saving and investing early for your kids, you should take a look at it.
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ALLY DONNELLY: Ken, Trump Accounts are brand new, and we’re going to get into how Trump Accounts work and how to open a Trump Account. But what should people know about these accounts, big picture?
KEN: Yeah, Trump Accounts represent an additional new way for families to help the next generation get a head start building a nest egg. And, as you know, many of us don’t start saving for retirement until we’re covered by a workplace savings plan. They’re also designed to take advantage of, tax deferral, the ability to invest in a diversified portfolio of US equities, and, of course, to take advantage of that long time horizon.
ALLY: These accounts are new, like we said, and some of the details are still being worked out. But let’s talk about what we know right now. When you open a Trump Account, the government makes a one-time $1,000 contribution, if your child is eligible. To be eligible, they have to have a Social Security number and be born in the US between January 1, 2025 and December 31, 2028. Now, while you have to be born during those dates to get the seed money, children under 18 with a Social Security number can have an account. You just don’t get that $1,000 contribution from the government. Generally, withdrawals are not allowed until the year the child turns 18. Trump Accounts are scheduled to launch July 4, but you can enroll anytime. So, Ken, let’s talk about that headline, that $1,000 contribution.
KEN: Yes. So the first thing is, if your child is eligible for that $1,000 seed money from the government, you should absolutely get it. And the reason is– let’s just do some basic math here. $1,000– if it’s the only thing that ever went into that Trump Account, invested in a diversified portfolio of US equities, assuming a 7% annual rate of return by the time the child turns 18, it could be worth $3,300. And if we projected that out to age 60, it could be $58,000. Now, naturally, it’s not enough to cover all of your expenses in retirement, but boy, it’s a great head start.
ALLY: Yeah. Yeah. There are several accounts where parents can save for their children. There’s Roth for Kids, 529s, UTMAs, UGMAs, and now these new Trump Accounts. But if I’m trying to figure out where I should put my money or how to see what’s best for my family, where do I start?
KEN: And so the starting point for families should always be, what’s the goal? What’s most important? Is it saving for an education? Is it helping the next generation save for a home? Is it saving for retirement? So depending on what the goal is, depending on what’s most important, you can align that to the type of account.
ALLY: All right. Let’s take them one account or one goal at a time. What if my primary objective is to save for my child’s education?
KEN: First, remember, we’ve got these new Trump Accounts. And if the child is eligible for the $1,000 seed money from the government, absolutely take it. We never want to leave free money on the table. But if your goal is to really build up enough savings to cover educational expenses in the future, you should consider opening a 529 college savings account. They are designed very specifically to be able to help a family save for a child’s education. They are tax-advantaged accounts. There are investment options that allow you to take advantage of the long-term growth potential of a diversified portfolio, and withdrawals are tax free, provided that they are used for qualified educational expenses. The good news is that 529s are designed with some flexibility. So if not all the money is used for a child’s education, you can reassign the beneficiary for a sibling. You could also roll unused money into a Roth IRA. And those are just two options that people have.
ALLY: You talked about helping your child buy a house. So what if my primary goal is saving for a child?
KEN: What do you think I’m going to say first?
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Don’t leave the $1,000 seed money on the table. So you’ve got to– let’s take care of that. Next, what you should do is determine whether or not your employer will allow for pre-tax contributions into the Trump Account because it’s a great additional tax-advantaged way to save more for your child’s future. Once you get past that, if it’s really for general savings, a UGMA or UTMA account is a good choice. They are basically brokerage accounts. They have a lot of flexibility in terms of the types of investments. They are custodial accounts. Their assets are owned by the minor, but the investment decisions are made by the adult. And when the child becomes age of majority, when they become an adult, that money automatically becomes their own.
ALLY: All right. Now I’m taking the longer view, and I do want to focus on retirement savings for my child. Where do I start there?
KEN: Sure. The first thing you should do is take advantage of the $1,000 seed money that the government is offering. Next, determine if your employer will allow for pre-tax contributions into the Trump Account. And then you continue to make contributions into a Trump Account. If you want to save even more, then you can consider using a UGMA or UTMA as a way to gift additional dollars to a child. And then once your once your kid has earned income for, from any type of job, they’re eligible for opening a Roth for Kids, which will allow them to, again, build up more of a nest egg over the long term.
ALLY: All right. Walk me through the benefits of a Roth IRA.
KEN: The advantage is that it allows dollars to grow on a tax-free basis. And at the age of 59 and 1/2, provided all conditions are met, those dollars can be withdrawn tax free.
ALLY: We’ve talked a lot about saving for our kids. But as we look at building that financial foundation, how would something like the Fidelity Youth account fit in?
KEN: The Fidelity Youth account is a great starter account for teens. It’s really important that we create opportunities for people to become more confident, better investors. The teen account is actually– it’s owned by the teen. They have all of the investment decision-making authority on the account. Parents have visibility, but the teen really actually owns the account. It’s a great way for a teen to understand investing, how to place trades, how to understand performance, et cetera.
ALLY: Yeah, yeah. All right. Let’s turn back to Trump Accounts specifically with a few more details. So right now, you can contribute up to $5,000 a year into a Trump Account. The money has to be invested in low-cost index mutual funds or ETFs. Initially, the Treasury will set up and manage these accounts. But over time, families will be able to roll them over to financial institution. So, Ken, what happens to the Trump Account when my child turns 18?
KEN: Yeah, when your child turns 18, it is basically treated as a traditional IRA. So they can continue to make annual contributions, once they have earned income. They can invest those contributions in a diversified portfolio, take advantage of long term, tax deferred compounding
ALLY: Nitty-gritty– how do I open a Trump Account?
KEN: Pretty straightforward. You go to TrumpAccounts.gov and open the account. Make sure that you have the documentation that you need, Social Security number, and know whether or not your child is eligible for the $1,000 seed money. And essentially, you’re filling out Form 4547.
ALLY: OK. And if I choose to make contributions, what do I need to know?
KEN: You need to know that you’re making these contributions with after-tax dollars. And so there’s really no opportunity to deduct these contributions from your taxes.
ALLY: We’ve gone through each of these accounts and talked about the goals. But big picture, if I’m still trying to sort it out. Does Fidelity have a point of view on a hierarchy of these accounts?
KEN: We do have a point of view. And most families should consider the following. Number one, take advantage of the $1,000 seed money in the Trump Account. Number two, consider opening a 529 college savings account for future educational expenses. Number three, consider the Trump Account as a complementary way to continue to build long-term wealth for your child. If you want to have even more flexibility, consider opening a UGMA, UTMA account. And then finally, once your child has earned income, consider opening a Roth IRA for Kids.
ALLY: All right, Ken, bottom line.
KEN: Bottom line is families can take advantage of a mix of these accounts to help build their child’s financial future. Having the flexibility, and taking advantage of long term growth potential, will certainly put, you know, your family and your kids in a position of strength when it comes to their financial foundation.
ALLY: Awesome. Ken, thank you so much. If you want to open one of these accounts that we’ve talked about, check out the links on this page or in our show notes. And thanks for watching Fidelity Viewpoints.
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