Suze Orman's Concerns Over Proposed 'Trump Accounts' and Why Roth IRAs Still Reign Supreme
Financial expert Suze Orman has voiced concerns about the potential pitfalls of the proposed "Trump Accounts" for children, highlighting taxation issues and suggesting that Roth IRAs may be a more advantageous option for many families. This comes as details emerge about the "One Big Beautiful Bill" that could establish these accounts.
The Promise of 'Trump Accounts'
Under the proposed plan, every qualifying child born after Dec. 31, 2024, and before Jan. 1, 2029, would be eligible for a free $1,000 Trump Account. Parents would have the option to contribute up to $5,000 per year, while employers could also contribute $2,500 annually without impacting the employee’s taxable income.
Suze Orman's Reservations: Taxation and Alternatives
Despite the initial appeal, Suze Orman remains unconvinced that these accounts are a universally great deal. Her primary concern revolves around the uncertainty surrounding taxation upon withdrawal. "One of the reasons I think that is because I can’t get agreement as to how that money will be taxed when it’s withdrawn," she stated in a recent podcast episode. She fears these accounts may turn into traditional IRAs when the child turns 18, leading to taxes on all withdrawals, including contributions.
Roth IRAs: A Potentially Better Path
Orman suggests that a Roth IRA might be a better option, especially if the child has earned income. "In the long run, really, I’d rather see you do a Roth IRA for your child and where you could fund it, but to do that obviously your child has to be working," she explained. Contributing to a Roth IRA when younger and in a lower tax bracket allows for tax-free withdrawals in retirement.
Other Investment Options
Orman also suggests a standard investment account, offering flexibility without tax advantages, allowing children to access the funds immediately instead of waiting until retirement age. CNBC Make It echoed these sentiments, suggesting that brokerage accounts and Roth IRAs may offer more flexibility and favorable tax treatment compared to Trump Accounts for long-term investing.
The Importance of the Roth IRA 'Five-Year Rule'
Orman is also strongly advocating for opening a Roth IRA immediately, emphasizing the importance of the "five-year rule". Even a small contribution of just $1 can start the clock ticking on this rule, ultimately saving individuals from future tax headaches.
Understanding the Roth IRA 'Five-Year Rule'
The Roth IRA offers tax-free growth and withdrawals once certain conditions are met. While contributions can always be withdrawn tax-free and penalty-free, the earnings portion is subject to the five-year rule. To withdraw earnings tax-free, one must be at least 59½ and have had the Roth IRA open for at least five years.
Starting Early Matters
Orman highlights that timing is crucial, especially for those opening a Roth IRA later in life. Even if over 59½, they must still wait five years to access earnings tax-free. Similarly, Roth conversions have their own five-year rule, with each conversion starting a new clock. However, future conversions might align with the timeline of the initial account if it has been open for at least five years.
The Takeaway: Start Your Roth IRA Today
As Suze Orman emphasizes, the key is to start now, even with a minimal contribution. "I don’t care how you get that $1 in it," she stated. "But if you open a Roth IRA and fund it with just $1 that is the Roth IRA that is going to follow you." Opening a Roth IRA, regardless of the amount, initiates the countdown to tax-free growth and withdrawals, securing your financial future.
