Advisors with clients interested in using Trump accounts can weigh in on proposed rules related to the investment choices available in these accounts.
Those proposed rules would limit investment options, making them either too prescriptive or helpful in avoiding paralysis by analysis, in different advisors' views.
The new tax-advantaged savings accounts for children, known as Section 530A accounts or Trump accounts, would allow certain eligible investments under proposed regulations from the U.S. Department of the Treasury and IRS. Those agencies will
Advisors see pros and cons for Trump accounts, which launched on July 4, compared with other methods of saving for children that have existed for a longer time like 529 education savings plans.
Although the Treasury offered four specific index ETFs when Trump accounts launched, the proposed rules would expand eligible investments during the "growth period," which lasts until the beneficiary reaches age 18, to be any that meet certain criteria. Eligible investments include indexes made up of primarily U.S. companies, without leverage and fees of 0.1% or less.
"Usually, the government doesn't get involved in investment decisions," said Eric Bronnenkant, head of tax and director of tax advisory and planning at Santa Clara, California-based Edelman Financial Engines. "This is probably the most prescriptive type of investment rules that I've seen through taxes. Usually things on IRAs and 401(k)s — they're nowhere near as prescriptive as something like this on the Trump accounts."
Daniele Griffith, director of tax operations at New York City-based tax planning platform April Tax Solutions, said it is good there are more diversified investment options available under the proposed rule than there originally were.
The proposal is "covering a larger group of stocks — you're not going to have that volatility," she said. "You're also covering a larger group of capitalization of those stocks. So you have large caps, which still dominate all of those type of funds, but you also have some mid-cap and small-cap as well. So you're going to get more diversification from that overall."
The low-risk aspect of the investment choices, however, might not be optimal for young investors, however, Griffith added.
"If the plan is for that money to really seed retirement in the future … or a house or any of those different things, I feel like you could be very aggressive with a 1-year-old or 2-year-old because you're going to ride out those bumps overall," Griffith said. "So I don't think being necessarily too conservative is appropriate, especially considering that the children are young and have that time frame to roll that out."
A lawyer, however, held a different view, arguing that low-risk investments could work well for children's long-term savings.
"Financial advisors will tell you the younger you are, the riskier your investments can be, but I think that's not entirely true when the owners of these accounts are under 18," said Benjamin Sunshine, Fort Lauderdale, Florida-based senior associate in Brinkley Morgan's wills, trusts and estates practice. "Once you're in your 20s, then you can probably be a little bit more riskier in your investments, but when you're in that growth period, you should probably stay to pretty conservative, safe investments. … That's the idea that Treasury had in mind with their proposed rules, so it makes sense to me."
Avoiding paralysis by analysis
The proposed rules would offer accountholders a limited number of funds to potentially invest in.
It is helpful to have specific investments available because "most people aren't that knowledgeable," Griffith said. So it could be helpful that Trump accounts won't "have many options, and they're very clear options where you can compare them side-by-side to make those decisions. And I think having that clarity makes people feel more comfortable and more knowledgeable in general about their investments because it's very intimidating."
Bronnenkant, the tax advisor, also saw limited choices as a plus for parents who want to easily save for their children's futures.
"Some people kind of run into analysis paralysis," Bronnenkant said. "I definitely understand the general goal of keeping things relatively limited as a way to encourage people to sign up and participate as much as possible," and then after the beneficiary reaches age 18, the account becomes a traditional individual retirement account, and there will be more investment possibilities.
