530A Accounts for Children Under Age 18

530A, inheritance, investing, IRA 9 Minutes

The new 530A accounts (aka, “Trump” Accounts) are now live and you are able to contribute to them. (Theoretically available, at least, I don’t have a child under 18 to test it with. But should be available very soon if not today.) This account is a new type of investment account you can open and contribute to for any child under age 18 (the ability to contribute stops in the year they turn 18). This is the latest child-focused investment account and takes its place alongside the 529 College Savings account, the ABLE account (for those with disabilities), the Roth IRA (for kids who have earned income), and the UGMA/UTMA taxable brokerage account (in the child’s name). Let’s take a look at the important features of 530A accounts.

Purpose

The purpose of a 530A account is to create a retirement account for your child that you (and sometimes others) can contribute to from the get-go (as soon as your child has a Social Security number) before your child has earned income of their own that they can contribute. The funds are invested and grow tax-deferred until withdrawal. When the child turns 18, the account becomes theirs and transitions to a Traditional (pre-tax) IRA (with all the normal rules that apply to Traditional IRAs).

Contributions

There are effectively five distinct types of contributions that you might be able to access (not everyone will be able to access each type).

  1. Government: If your child was born in 2025 through 2028 (currently, the expectation is that it will be extended beyond 2028), the government will contribute $1,000 to the account (but only if you open it, it’s not auto-enroll). This does not impact your taxes in any way, but this money is considered pre-tax and will be taxable upon withdrawal. This does not count toward the annual $5,000 contribution limit. You will have to file Form 4547.
  2. Employer: Some employers may choose to contribute up to $2,500 per year (per employee, not per child of that employee). This also does not impact your taxes now but is considered pre-tax money and will be taxed on withdrawal. This does count toward the annual $5,000 contribution limit.
  3. Nonprofits: Some nonprofits are being setup to contribute funds to these accounts, but the rules are very specific to avoid gaming the system. A nonprofit can only contribute equally to one of the following classes of people:
    • All account beneficiaries under the age of 18
    • All account beneficiaries under the age of 18 who reside in one or more qualified geographic areas (such as a US state)
    • All account beneficiaries under the age of 18 who were born in a specific calendar year

      Two prominent examples are from the Dell Foundation ($250 for kids 10 and under born prior to 2025 in zip codes with median household income of less than $150,000), and from Ray and Susan Dalio ($250 for children in Connecticut in zip codes with a median household income of $150,000 or less).

      This money does not impact your taxes but is considered pre-tax and will be taxed on withdrawal. These donations do not count toward the $5,000 annual contribution limit.
  4. Parents, guardians, relatives, and friends: Can contribute up to $5,000 (minus any employer contributions) per year per child. This is after tax money, so you do not get any tax break for this contribution. Like all 530A funds, it grows tax deferred. Upon withdrawal the up to $5,000 contribution itself is basis, so will not be taxable, but all of the earnings will be. You will not have to file annual gift tax reporting for this contribution (unless total gifts exceed the current $19,000 annual gift tax exclusion (the up to $5,000 does count toward the $19,000).
  5. Parents (and I think Guardians) Through Payroll Deduction: If your employer offers this, you can make Section 125 contributions from your paycheck (again, up to the aggregate annual limit of $5,000). This is the only option that gives you a tax break now, as it comes out pre-tax (including FICA). This money is pre-tax and will be taxed on withdrawal. You will not have to file annual gift tax reporting for this contribution (unless total gifts exceed the current $19,000 annual gift tax exclusion, the up to $5,000 does count toward the $19,000).

    The $5,000 annual limit and the $2,5000 employer limit will begin being indexed to inflation in 2028. It’s unclear (to me) whether the $1,000 will be (that presumably would be part of any extension discussion).

Investments

Contributions have to be invested in a low-cost (less than 0.10% expense ratio), US stock index fund. The default investment is SPYM (State Street S&P 500 Index Fund with an expense ratio of 0.02%). You will also be able to choose to invest in other funds that meet the criteria, which currently include the following approved funds:

The Bank of New York Mellon will host the initial accounts, although you will be allowed to transfer them to your brokerage account.

Traditional IRA at Age 18

Once the child turns 18, the account turns into a Traditional IRA in the child’s name (and they have full control over it). All of the usual rules apply, including taxes and penalty for early withdrawals and the ability to make Roth conversions. They presumably will also be able (once they turn 18) to combine it with any other Traditional IRAs they have and/or make this their traditional IRA and make new Traditional IRA contributions to it from earned income. They presumably will also be able to choose whatever investments they want at that point.

(Note that nothing about 530A accounts or contributions impacts the IRA contribution limits for kids who have earned income before the age of 18, they still can contribute up to their earned income or the yearly maximum to their IRA whether they have a 530A or not).

Should You Open and Contribute?

So, should you open and contribute to a 530A account (assuming you have at least one child under age 18)?

  • If you have a child born in 2025 or 2026 (and will have one in 2027 or 2028), you should definitely open up an account to get the $1,000 contribution from the government.
  • If you qualify for any of the nonprofit contributions (from the Dells, the Dalios, or anyone else), you should definitely open up an account and get that money.
  • Similarly, if you work for an employer that will contribute to the account on your behalf you should also open one. Free money is always good.

It’s a bit more complicated when thinking about whether you should contribute your own money (especially if it’s not via payroll deduction so you don’t get a tax break for the contribution). First, to be clear, this is a question for folks with privilege, because you likely should only be contributing to these accounts if you have already exhausted all the tax-advantaged accounts available to you and your partner and have completely met your own saving and investing needs (including taxable brokerage accounts). If you then have additional funds you would like to give to your child, then that can be very powerful, but you have to evaluate all of the different account options available to you. Here is my current thinking (subject to change) on the order of operations for gifts to your child that I think would make sense.

  1. 529 College Savings Account: Fund this first to the extent that makes sense to you (particularly if you are in a state that gives you a tax incentive for contributions).
  2. Roth IRA “Matching”: If your child has earned income, then “matching” their contribution to their Roth IRA (which might actually be making the entire allowed contribution) would be next.

    (In fact, this might precede the 529 in the order of operations, but since most children don’t have earned income until their mid-teens I’m listing this second as a practical matter).
  3. 530A or UTMA/UGMA: I’m not sure which one would be third and which one would be fourth because there are too many variables regarding your individual situation and the plans of the child involved. I suspect this might be similar to the Traditional vs. Roth discussion, where contributing a bit to both could make a lot of sense. Keep in mind that the UTMA/UGMA account is much more flexible and, unlike the Traditional IRA (or Roth IRA if you do conversions) can be easily accessed before age 59.5 without penalty.

    (On the other hand, UTMA/UGMA accounts can also adversely impact financial aid.)

Potential 530A or UTMA/UGMA Strategies

The are five scenarios that I’ve thought of (I’m sure there are more, but this will at least get your thinking started). Each one of these has a spreadsheet tab devoted to it to see how it could play out. It’s important to keep in mind that these are projections and as such are very much just brainstorming spreadsheets, not exact. It’s also important to keep in mind when comparing the scenarios that they are not exactly apples-to-apples, because these scenarios incur different amounts of taxes that have to be paid along the way, and since the funds for those taxes are coming from outside the accounts considered they are not explicitly factored in to the comparison.

(There also may be mistakes in the spreadsheets, if you find any please let me know so that I can update them.)

  1. Scenario 1: Get the $1,000 government contribution for a child born in 2025-2028, don’t contribute anything else, and leave it in a traditional IRA to at least age 60: $251k in a Traditional IRA at age 60.
  2. Scenario 2: Get the $1,000 government contribution for a child born in 2025-2028, don’t contribute anything else, then convert to a Roth IRA beginning at age 18, then leave it until at least age 60: $295k in a Roth IRA at age 60 (more than Scenario 1 because the taxes paid on the conversion effectively boosts the amount in the account).
  3. Scenario 3: Get the $1,000 government contribution for a child born in 2025-2028, contribute $5,000 a year directly through age 17 (assumes no payroll deduction available), and leave it in a traditional IRA to at least age 60: $11.3 million in a Traditional IRA at age 60.
  4. Scenario 4: Get the $1,000 government contribution for a child born in 2025-2028, contribute $5,000 a year directly through age 17 (assumes no payroll deduction available), start Roth conversions at age 18, and then leave it to at least age 60: $13.5 million in a Roth IRA at age 60.
  5. Scenario 5: Contribute $5,000 a year to a UGMA/UTMA through age 17, then leave it until at least age 60: $12.2 million in a taxable brokerage account at age 60.

An important consideration that potentially impacts scenarios 2, 4 and 5 is the so-called “kiddie tax.” Children under the age of 18, children who are age 18 and not earning enough income to provide more than half of their own support, or children who are full-time students aged 19 through 23 and not earning enough income to provide more than half of their own support may be subject to the “kiddie tax” on any unearned income they receive. Effectively, they can receive some unearned income that is not taxed at all, some that is taxed at their marginal tax rate (typically 10%), and the rest has to be taxed at the parents’ marginal tax rate (this is to avoid wealthy parents being able to shelter asset growth by gifting it to their children). For the purposes of this post, the unearned income could come from one of two places: Roth conversions or dividends/capital gains in a UGMA/UTMA account.

For 2026, the limits for the kiddie tax is either $2,700 in unearned income (half not taxed, half taxed at child’s rate of 10%) or, if the child has earned income, they get a standard deduction of their earned income plus $450 (which, effectively, means $450 of unearned income is not taxed and then leaves up to $2,250 of unearned income that is taxed at their rate of 10%, with any additional then taxed at the parents’ marginal tax rate). These amounts are indexed to inflation, although they have to meet a cumulative minimum increase (like $100) before they are adjusted.

What this means for the two Roth conversion scenarios (2 and 4), as well as the UGMA/UTMA scenario (5) is that you have to factor in the kiddie tax into your decision making. For example, absent the kiddie tax the ideal time to make Roth conversions from a 530A account would be when the child turns 18 (and several years thereafter), because they likely don’t earn very much and will be in a 0% federal tax bracket (would still owe state taxes). But since a Roth conversion is unearned income (on the earnings, not on any basis like the after-tax parent contributions), anything over the kiddie tax limit would be taxed at the parents’ marginal tax rate. So there may be room to make limited Roth conversions between ages 18 and 23, but the bulk of the conversion might have to wait until age 24 or later (when the kiddie tax no longer applies).

(Or, alternatively, you might just go ahead and make the entire conversion earlier even if you have to pay at the parents’ marginal tax rate, depending on the amount of conversion, what that tax rate is, and other factors.)

Similarly, if you contribute to a UGMA/UTMA account and it throws off dividends or capital gains each year, you’ll have to watch the amount or you may end up being taxed at your marginal tas rate.

(To be clear, these are all good problems to have.)

As the spreadsheets show, even if you only take the $1,000 from the government (scenarios 1 and 2), it grows to a sizeable amount by the time the child is retirement age. And if you contribute $5,000 a year (scenarios 3, 4 and 5, either to a 530A or a UGMA/UTMA account), it grows to an incredible amount by the time the child is 60 (albeit with tax complications you’ll have to deal with). This is similar to what I described in this blog post, so don’t forget about helping them with their Roth IRA as well.

As always, tax rules could change and “it’s tough to make predictions, especially about the future.” But I think everyone who has a child under age 18 should think through their options and at least consider contributing some to a 530A if they are able to (and definitely take any free money).

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