How to Avoid the Age 18 Exit Trap on Trump Accounts
Most of the conversation about Trump Accounts has focused on the beginning.
Who gets the $1,000. Whether families should contribute more. Whether a 529 plan is still the better place to save for college.
There’s also been plenty of discussion about what happens at 18, when the account begins operating under traditional IRA rules. One obvious strategy is to convert some or all of it to a Roth IRA while the young adult is still in a low tax bracket.
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As a financial adviser with more than 25 years of experience, I see that that’s where planning gets more complicated.
An 18-year-old college student with little income might look like the perfect Roth conversion candidate. Under the kiddie tax rules, that assumption can be expensive.
What changes at 18
A Trump Account is a traditional IRA with special rules during childhood. Money generally can’t come out before January 1 of the year the child turns 18. After that, it’s generally treated as a traditional IRA.
Family contributions aren’t deductible, so they become basis and come back tax-free. The government’s $1,000 pilot contribution and qualifying employer contributions don’t create basis. They’re taxed as ordinary income when withdrawn, along with all the growth.
Here’s a hypothetical: Ignoring the $1,000 pilot contribution for simplicity, a family that contributes $5,000 a year for 18 years and earns 7% ends up with about $170,000: $90,000 of contributions and $80,000 of growth.
Left alone until 65, it grows to roughly $4 million, nearly all of it taxable when withdrawn. That’s why a Roth conversion is so appealing.
Why the kiddie tax changes the math
The kiddie tax generally applies to children under 18, to 18-year-olds whose earned income doesn’t cover more than half their support and to full-time students ages 19 through 23 who don’t meet that earned-income test. A taxable Roth conversion is unearned income for this purpose.
For 2026, the first $1,350 is effectively sheltered, the next $1,350 is taxed at the child’s rate, and net unearned income above $2,700 is generally taxed using the parents’ rate.
There’s a second constraint. You can’t convert only the tax-free dollars. Basis is spread pro rata, so every conversion carries the same taxable percentage as the whole balance.
Trump Accounts have an unusual twist: the IRS applies that calculation to the Trump Account separately from any other IRAs. In our example, about 47% of every dollar converted is taxable.
Here’s what timing does, holding the balance constant and using 2026 federal rates.
Converting everything at 19 as a full-time dependent student. About $80,000 is taxable, and almost all of it above $2,700 is taxed at the parents’ rate. For parents in the 24% bracket, the federal tax is about $18,700.
Converting over two years after graduation, on a $45,000 salary. Each year adds $40,000 of taxable income on top of the salary. The added federal tax is about $13,300.
Converting over two years once the kiddie tax no longer applies, with little other income. A young adult who is no longer a dependent gets the full $16,100 standard deduction and the 10% and 12% brackets. The federal tax is about $5,200 total.
Same account, same conversion and a difference of more than $13,000. The lesson isn’t to convert at a particular age. It’s to identify the right tax window.
The FAFSA problem
Because a Trump Account is a type of traditional IRA, the balance should generally fall under the FAFSA’s exclusion for retirement accounts.
The conversion income is the issue. It lands on the student’s tax return, the FAFSA uses tax information from two years earlier, and student available income, after applicable allowances, is assessed at 50%.
If need-based aid could be significant, model the FAFSA effect before converting, and consider avoiding large conversions in tax years that will feed into an application.
What families should do now
Keep records of every contribution. After-tax dollars are basis, and the young adult will need to document it on Form 8606. That applies to grandparents’ contributions, too.
Give each account its own job. For college, the 529 is still the right tool. Qualified withdrawals are free from federal tax, and a parent-owned 529 gets favorable FAFSA treatment.
Up to $35,000 of leftover 529 money can also roll to the beneficiary’s Roth IRA, subject to annual limits and other requirements, if the account has been open at least 15 years. The Trump Account is better suited to money the family doesn’t expect to need for decades.
Plan the conversation, not just the conversion. Your child owns the account from the beginning, even though a responsible party manages it during childhood. By adulthood, the conversion decision is theirs. The families who get this right will be the ones who explained the plan at 16, not the ones trying to explain it at 22 while the tax return is being prepared.
The rules are still developing
Treasury and the IRS have issued guidance and proposed regulations covering the pilot contribution, account administration, employer contributions and eligible investments. But several regulatory provisions remain reserved for future guidance, and some of the regulations are still proposed rather than final.
Everything here reflects the law and guidance available as of September 18, 2026. Revisit the strategy as additional guidance arrives, and certainly before the first conversion.
The bottom line
For families who qualify, the $1,000 pilot contribution provides a free head start. But that isn’t where the most important planning happens.
Treat the Trump Account as what it is: an IRA with an 18-year runway. What happens after that runway ends can have a meaningful effect on the account’s after-tax value. Getting the timing right could ultimately matter more than the original $1,000.
Tax rates and limits reflect 2026 federal law as of September 18, 2026 and may change. Examples are hypothetical, assume constant 7% returns, hold balances constant where noted, exclude the $1,000 pilot contribution, and are for illustration only. They do not represent any specific investment or client. State taxes are not included. This article is educational and is not tax or legal advice. Radiant Wealth Management operates under NewEdge Advisors, LLC and is not affiliated with the U.S. Treasury or any account provider mentioned.
