Alright, let’s start with the requisite political disclaimer. This piece isn’t an endorsement or degradation of any candidate or party. Love or hate President Trump – he’s got a tendency to illicit those strong emotions – there’s plenty of benefit for parents and grandparents to consider when it comes to newly available Trump Accounts.
Get past the name Trump and these accounts are essentially IRAs that the Treasury Department is kick-starting with $1,000 per account. From there, employers, grandparents and parents can contribute up to $5,000 per year until the child turns 18 years old. Love the name or hate it, one of the primary advantages of these accounts is harnessing the potency of time.
Advisors and parents can run their own calculations with this handy Ameriprise tool, but as the chart below indicates, starting with $1,000 and an annual contribution of $5,000 a year for 18 years assuming a very tepid annual return of 7% grows to nearly $160,000 and that’s with me fiddling around to make the inflation rate 3% per year and the tax rate 20%.
(Image: Ameriprise Financial)
Time in the Market…
The 18-year milestone is relevant in discussing the Trump Accounts because it’s a point at which the accountholders can withdraw some of the proceeds, provided those funds being used for educational purposes. Other early withdrawals can be initiated for first-time home buyers. For accountholders that don’t use the accrued funds for either of those purposes, as is the case with traditional and Roth IRAs, withdrawals start at 59.5 years old.
Regardless of what parents, etc. are hoping the capital will eventually be used for, the clear point is that Trump Accounts leverage the potency of time for the account holders.
“This approach reflects one of the most enduring principles in investing: time in the market has historically been more valuable than trying to time the market,” notes State Street Investment Management. “While markets experience periods of volatility, investors who remain invested have historically been better positioned to benefit from long-term market growth than those who repeatedly move in and out of investments to chase performance.”
Time in the market instead of timing the market gets into another perk of these accounts.
Start ‘Em Young on Good Investing Habits
No matter what parents do, they won’t be able to keep their kids offline, meaning at some point in their investing journeys, children become teenagers and young adults susceptible to some form of risk-taking in financial markets.
That’s likely part of the reason why the ETFs available in Trump Accounts, including the State Street® SPDR® Portfolio S&P 500® ETF (SPYM) – the default option – are bland and boring, but effective. Effective in terms of helping the accountholders establish solid investing habits when they’re young – habits that can stay with them for a lifetime. Regardless of the name of the account, learning the value of responsible investing at an early age is a priceless lesson.
“The structure helps reinforce many of the habits associated with successful long-term investing, including diversification, discipline, and consistent participation—habits that can become increasingly valuable over time,” adds State Street.
Related: How AI Is Making Financial Advisors More Valuable Than Ever