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Trump Accounts Create a 'Legal Backdoor' for Roth IRA Wealth, Tax Attorney Says
There’s a strategy that could help turn these new investment accounts into tax-free vehicles in retirement, some experts say.
TL;DR
- Trump Accounts, launching July 4, allow children to hold tax-advantaged savings and investment accounts similar to Roth IRAs.
- These accounts bypass the earned income requirement typically needed for Roth IRAs, creating a 'legal backdoor' for minors.
- Contributions can be made by family, friends, or employers, with limits on annual contributions.
- A strategy exists to convert pretax funds in Trump Accounts to Roth IRAs, potentially leading to substantial tax-free retirement savings.
- Potential downsides include the 'kiddie tax' rules, which can tax a child's unearned income at the parents' higher tax rate, and penalties for early withdrawals if funds are needed to cover taxes.
- For purposes other than retirement, such as education, 529 college savings plans may be a more advantageous option.