United States: New tax-efficient savings account for children and employees (under age 18)

Employer Action Code: Act

The Working Families Tax Cuts Act created a new type of tax-favored individual savings account (Trump Account – TA) that may be opened for children under age 18, to encourage savings from an early age. A notable feature is that employers may contribute on a tax-efficient basis to the TAs of their employees’ children (or employees) under age 18 or allow employees to contribute pre-tax dollars to their children’s TAs through salary deduction.

Key details

• In general, a TA may be established for an individual with a social security number prior to the end of the year that the individual attains age 18. TAs must initially be opened with the U.S. Treasury, by submitting Form 4547 to the Internal Revenue Service, but then the account may be rolled over to a TA with a private provider during the “growth period” (i.e., through the end of the calendar year before the account beneficiary reaches age 18)
• Contributions to TAs are not permitted prior to July 4, 2026. Once permitted, during the growth period contributions are generally permitted in aggregate up to $5,000 per year (indexed after 2027) to a TA. Contribution limits during the growth period are independent of limits on any other retirement accounts. Individuals’ contributions (other than salary deductions) are not tax-deductible. Investment returns are tax-deferred until funds are paid out
• The federal government will make a one-time contribution of $1,000 to the TAs of children born in 2025 through the end of 2028 who are U.S. citizens, which will not count toward the $5,000 annual limit
• Employers may make contributions to a TA either (i) as direct contributions to the TA of an eligible employee or their dependent children or (ii) by allowing an employee to make pre-tax salary deferral contributions through a TA contribution program (TACP). The combined employer contribution and pre-tax salary deferral contributions made by the employee are capped at $2,500 (indexed after 2027) per employee and per year
• Employers that wish to establish a TACP must have a written plan document, and contributions must satisfy a non-discrimination test. More information regarding these and other requirements will be provided in future IRS regulations 
• During the growth period, TAs must be invested in low-cost mutual or exchange-traded funds that track the returns on stocks of primarily U.S. companies. After the growth period, TAs are generally subject to the same rules (e.g., contribution limits and distribution rules) as apply to traditional individual retirement accounts (IRAs), including taxation (employer and pre-tax employee salary deferrals, along with earnings, are not taxable until distributed, and the TA beneficiary is responsible for any taxes on the distribution)

Employer implications

Employers should consider the opportunity that TAs may offer as a tax-advantaged employee benefit. The government is expected to issue implementing guidelines on the plans in the coming months. These guidelines, among other things, are expected to clarify whether TACPs are subject to the fiduciary requirements under the Employees’ Retirement Income Security Act (ERISA) and how non-discrimination testing requirements will apply.

Contacts

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Gary Chase

Director, Technical Services

email Email phone +1 212 309 3802

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David Amendola

Senior Director, Retirement
Defined Contribution Strategy – Intellectual Capital & Innovation Leader

email Email phone +1 203 219 4594

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