Warren Buffett describes compounding as the eighth wonder of the world. When tracking the growth of his wealth, it’s clear that time has been a major factor. Apparently, he bought his very first stock at age 11. So, he’s been an investor for over 80 years! Given the strength of the math here, Buffett may rue those 11 years he was on this earth and wasn’t an investor!
It’s a conundrum many of our clients who are parents and grandparents may identify with. How best to take advantage of the long-time horizon enjoyed by our youngest loved ones.
The best option has traditionally been funding a 529 account. The generous contribution limits, state tax deduction (depending on the state) and tax-free compounding are all very compelling. The major restriction is that it is restricted to qualified education expenses. Although recent legislation has loosened those restrictions somewhat, it remains a very targeted method of giving.
Custodial accounts are a solid option. No funding restrictions and open investment architecture make them attractive to the beneficiary but there is no tax benefit and at age of majority (18 or 21), they convert into an individual account with no guardrails on spending.
Custodial retirement accounts are extremely attractive for long term tax deferred growth, but the biggest hurdle is the need for earned income which most children do not have.
In 2026, there is a new solution to this problem. The One Big Beautiful Bill Act (OBBA) of 2025 created ‘Trump Accounts’, also referred to as 530A Accounts after the section of the Internal Revenue Code which defines them. These are tax deferred custodial accounts for minors which can be used for retirement, education or a home purchase.
Much of the current administration’s promotion efforts have focused on the $1,000 seed deposit for newborns, or the grants by high profile philanthropists. They’ve highlighted the opportunity for financial literacy and agency in the next generation of Americans. Clients should consider these new vehicles as another arrow in the planning quiver. These new accounts could make sense in addition to the other structures.
The Trump account neatly replaces the custodial retirement account and may be much more effective. From age 0, with no earned income, $5,000 can be contributed annually so that by the time the account converts to an IRA at 18, they’ve enjoyed almost two decades of compounding. Any US citizen under 18 years of age can have an account so it’s not just for newborns.
Roth conversions in early career?
By far the optimal use of this account structure would be to fully fund it throughout the child’s life, allow it to convert into an IRA at age 18 and then commence a strategy of converting the IRA into a Roth IRA during the early years of the beneficiary’s career. The taxes generated by the conversions would be paid at their rate, not the parent or grandparent. If we accept the program website’s projection of an account value of $271k* (based on historical S&P 500 averages these figures are hypothetical and not guaranteed) It’s likely the marginal tax rate would be lower for the young professional than for the elder but the taxes could be paid by the benefactor (provided the tax doesn’t exceed the annual exclusion amount). Actual tax treatment will vary by account and should be modeled individually.
The earliest folk generally contribute retirement dollars is 22. To be able to get a two decade headstart and potentially convert those savings into an after-tax Roth structure should have a powerful impact on long term wealth building. It’s a conversation worth having with your Portfolio Manager. The name of the program may be polarizing, but the planning benefits should be quite unifying!
How they work:
• $1,000 seed money for children born January 1, 2025 – December 31, 2028
• Additional grants may be available from philanthropists and employers
• Annual limit of $5,000 in contributions
• Investments limited to low fee U.S. Index Exchange Traded Funds
• No withdrawals allowed before age 18
• At age 18, accounts convert into a traditional tax deferred IRA
• Penalty free withdrawals available for home purchase downpayments or education
How to open an account:
• Elect via Form 4547 — with your tax return, through your IRS online account, or at TrumpAccounts.gov
• Once processed, activate and fund the account through the Trump Accounts app or TrumpAccounts.gov.
• Once eligibility is established to hold an account and potentially receive the seed money, the account can be opened, linked to a bank account and funded.
The Highlights
• IRA without need for earned income
• Roth conversion opportunity with the assets in early carer (lower tax bracket)
• Low-cost diversified ETFs designed to encourage long term investing habits
• Augments current account structures like 529s, custodial accounts etc.
• Seed money is a no-brainer if you qualify but arguably not the most important feature
*Value based on account opened at birth, funded with $5k each year as well as $1k seed money and growth based on historical S&P 500 average returns)
About the author: Mel Casey, CFA, CAIA
Mel brings nearly two decades of financial services and investing experience to the FBB team. As a Senior Portfolio Manager, Mel is responsible for managing client relationships and client investment portfolios. Prior to FBB Capital Partners, Mel spent several years at 1919 Investment Counsel where he managed individual and institutional client portfolios, a Financial Services Mutual Fund and a Real Estate Equity Strategy. Prior to his time with 1919, Mel held various roles with investment banks Keefe, Bruyette & Woods and Compass Point Research in New York and Washington, DC respectively. A native of Dublin, Ireland, Mel received his Bachelor of Commerce degree from University College Dublin. He is a CFA®, and CAIA charterholder, a member of the CFA Institute, and a member of the CFA Society of Washington, DC. Mel lives in Bethesda, Maryland with his wife Jenny and their two children.
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