Recent federal legislation introduced what are referred to as “Trump Accounts” under Section 530A of the Internal Revenue Code. These accounts function as specialized retirement accounts for children and represent a new planning consideration for dental practice owners.
The Basics
A Trump Account may be opened for a child under age 18 who has a valid Social Security number. Contributions of up to $5,000 per year per child are permitted from parents, family members, employers, or other contributors. Earned income is not required while the child is under age 18.
For qualifying children born within the legislated date range, the federal government provides a one-time $1,000 seed contribution. That contribution is treated as pre-tax.
The account operates under specific Trump Account rules until the end of the calendar year before the child turns 18. Beginning January 1 of the year the child turns 18, the account becomes a traditional IRA and is governed by standard IRA rules, including earned income requirements for future contributions and traditional IRA distribution rules.
Tax Treatment
Investment growth inside the account is tax-deferred. Contributions made by parents, family members, or friends are after-tax and create basis in the account. The federal seed contribution and employer contributions are treated as pre-tax funds.
When distributions are taken, taxation follows traditional IRA pro-rata rules. The taxable portion is determined by the ratio of pre-tax contributions and earnings to after-tax basis. This mirrors how traditional IRAs are treated when they contain both deductible and nondeductible contributions.
Strategic Considerations for Dental Practice Owners
Trump Accounts can serve as a supplemental savings tool, but priorities matter.
First, your own retirement planning must come first. As a dental practice owner, your long-term financial security depends on disciplined savings and tax-efficient structuring. There are no loans available to fund retirement.
Second, if education funding is the primary objective, 529 plans generally provide superior tax treatment when funds are used for qualified education expenses because qualified withdrawals are tax-free.
Third, dental practice owners have a unique advantage. By legitimately employing children within the practice, you can create earned income that allows for Roth IRA contributions. A properly funded Roth IRA at a young age can provide decades of tax-free growth and flexibility. Roth IRA contribution limits are separate from Trump Account limits.
Roth Conversion Planning
After age 18, a Trump Account may be converted to a Roth IRA. Any pre-tax contributions and earnings included in the conversion would be taxable in the year of conversion. Because young adults often have relatively low income, conversion planning may present opportunities for tax efficiency depending on their overall tax situation at that time.
Final Thoughts
At Dental CPA, we help dental professionals integrate tax strategy, retirement planning, risk management, and long-term wealth building into a cohesive financial plan.
If you would like to evaluate whether Trump Accounts or Roth IRA strategies for your children align with your overall financial goals, we invite you to schedule a consultation with Dental CPA to review your specific situation and structure.
Disclaimer
The information provided in this article is for general educational purposes only and does not constitute personalized tax, legal, or financial advice. Tax laws and regulations may change, and individual circumstances vary. Before implementing any strategy discussed, consult with a qualified advisor to evaluate how it applies to your specific situation.