Treasury Proposes Pre-Tax Trump Account Contributions
(Bloomberg) — Parents would gain a new way to shelter up to $2,500 a year in wages from federal income taxes under a new Treasury Department proposal that expands the potential financial appeal of the president’s signature Trump Accounts.
The proposal, released Tuesday, goes beyond the parameters set by Congress for the tax-advantaged children’s savings and investment accounts when it established them last year.
The proposed rule, which is not yet final, would extend to Trump Account contributions the same treatment available to health savings and flexible spending accounts, by allowing parents to make pre-tax contributions to the savings accounts, lowering their own taxable income.
Even so, other savings vehicles may offer more advantages, depending on how the funds will ultimately be used and the family’s tax situation. For example, 529 plans can provide greater overall tax benefits if the funds are used for education. Investments grow tax-free, and funds can be withdrawn tax-free when used for qualifying expenses.
Congress established Trump Accounts, which track broad-based investment funds and can grow tax deferred until a child comes of age, in last year’s sweeping tax law. Trump Accounts convert to a traditional Individual Retirement Account when a child reaches adulthood. Withdrawals are subject to income tax.
The proposed rule makes “funding a Trump Account more attractive, without making the account itself more attractive,” said Taylor Hart, a certified financial planner and president of Steadmont Advisors in Birmingham, Alabama. “The deduction is real but modest, and it doesn’t change what you own or how it comes out.”
Read more: What Are Trump Accounts and How Do They Work?
In addition to providing $1,000 in federal seed funding for children born between the start of 2025 and end of 2028, lawmakers allowed parents and others to contribute up to $5,000 annually in post-tax earnings to the accounts. They also gave employers the option to provide $2,500 in tax-free annual contributions to Trump Accounts of their workers’ dependents.
The Treasury Department’s proposed rule essentially allows employees to pay for the employer contribution through a payroll deduction and thus avoid income taxes on the earnings.
That would count toward both the $2,500 limit for employer contributions, as well as the $5,000 total annual limit for a child’s Trump Account.
The proposed regulation does not resolve the tax treatment of future withdrawals, since the accounts could contain a mix of pre- and post-tax contributions.
The parents who have money to save in Trump Accounts will be “those who already have resources in the first place,” economist Darrick Hamilton, a professor at the New School for Social Research in New York, said in an email.
The accounts further “a tax structure that already privileges people and families with existing wealth and resources rather than promoting greater access to the benefits and privileges of wealth,” he added.
So far, more than 50 companies have committed to making contributions on behalf of their employees, including Chime, State Street, Vanguard and Visa, according to Treasury.
The proposal sets an overall $2,500 annual limit for each employee, regardless of the number of children they have.
The proposed rule would not allow minor employees to make tax-free contributions to their own Trump Accounts.
