Financial Planning 101: Parents Need Two Accounts for Every Child

This series will address financial planning topics ranging from budgeting to investment management and tax planning, targeting timely updates which I believe could be of interest and value to you.

Newsletter 3 of 10: Parents Need Two Accounts for Every Child

By utilizing just two accounts, a 529 and a Trump account, any parent can strongly position their children for education, family & career. This simple two-account approach constitutes a powerful plan for parents with investable income.

Account #1: 529

Goal: Fund College by their 18^th Birthday

Your first goal is to build a parent-owned 529 account that will fully fund your child’s undergraduate college expenses by their 18^th birthday. The 529 Plan is a dedicated, tax-free growth engine for qualified education expenses and should be the centerpiece of your college planning. For those utilizing a Georgia-based 529 plan, married couples are incentivized with an $8,000 annual state income tax deduction.[i] If you maximize that deduction by contributing $8,000 every year from your child’s birth, and we assume an 8% annualized return, you will actually hit the state’s ceiling before your child gets his driver’s license. Georgia imposes a maximum account balance cap of $235,000[ii] and by the time he turns 16, compound growth will push the account balance past that cap, at which point contributions are no longer allowed. If investment returns are lower than expected or if you can’t make the contributions at some point due to hardship, you’ll have a couple of years with which to play.

Account #2: Trump Account

Goal: Provide Them with Significant Capital as they Begin Family & Career

The introduction of the Trump Account in 2025 has provided us with a generational wealth-building tool. For the uninitiated, Trump Accounts allow us to contribute up to $5,000 per year, post-tax, until a child turns 18.[iii] But the true power of this vehicle isn’t in its initial phase; it is in the transition. At age 18, the account automatically converts to a Traditional IRA. During those early adult years (say ages 18 to 25), your child will likely have little to no taxable income. This presents a golden window to methodically convert the Traditional IRA funds into a Roth IRA, paying little to no federal income tax on the conversion. Let’s look at the numbers, because they are staggering. If you maximize contributions funding $5,000 annually from your child’s birth until their 18^th birthday and we assume 8% annual returns, that account value will reach roughly $187,250 by the time they turn 18. Once converted to a Roth IRA, that $187,250 is left to compound forevermore without accruing tax liabilities.

They can withdraw the basis (that is, the annual contributions in this case) for any reason tax- and penalty free and this could serve as an incredible resource for them when buying a first home or launching a business. There are additional opportunities to access funds for higher education expenses for them, their children and/or grandchildren, for medical expenses, or for expenses related to birth or adoption.

When handing the Trump Account off at age 18, a pep talk encouraging them to continue investing in the account would be appropriate, but’s let calculate the projected account value if they do nothing but the Roth conversion after you hand off the new IRA.[iv]

This is your opportunity to channel Vanderbilt, Carnegie and the other Robber Barons to smartly bequeath your children a large nest egg. Consider for a moment the fellow travelers who rely solely on trusts to pass down this kind of wealth. They quickly learn the painful lesson of “tax drag” as trusts face draconian, compressed tax brackets, hitting the maximum 37% marginal federal tax rate on retained income at barely over $15,000. That annual tax drag suffocates compound growth. By utilizing the Trump Account and executing the Roth conversion, you are securing decades of tax-free growth that a trust simply cannot replicate.

In closing, just do two things:

• Prepare your child for career success by fully funding their college education via the 529
• Seize the “Trump Account + Roth conversion” opportunity to provide them with significant capital and all of the opportunities that come with it just as they are beginning family and career

These two goals as presented leave many questions unanswered:

• What about using the 529 for elementary and secondary education?
• Should we plan to fund graduate school?
• Can and should we transfer funds between our children’s respective 529s?
• What if he or she doesn’t go to college?
• What are the qualified expenses for a 529?
• When can money be pulled from the Roth IRA?
• Is it wise to give your children a large windfall? (Will he use the cash to buy a Donzi Marine cigar boat?)
• Will Trump accounts survive a future Democratic administration?

All good questions. For my readers, I will stand on the two simple recommendations!

[i] I am writing from Atlanta. State-level benefits and plans vary but state-based tax advantages are simply icing on the cake. In their absence, the primary goal of a college fund remains fully intact.

[ii] Most state caps range from $400-600,000. SB266 proposes to raise Georgia’s cap, now the nation’s lowest.

[iii] This ignores the $1,000 government contribution provided to children born 2025-2028 and the Micheal Dell pledge to provide $250 to children in ten disadvantaged zip codes.

[iv] You must manage this carefully to avoid the “kiddie tax.”