How Highly Should You Value a 530A Account?

An inheritance can take many forms: cash, investments, property, family heirlooms.

Inheritances also can differ in their timing. Most owners don’t transfer these assets until their death. And according to Federal Reserve data, that’s not likely to happen until the recipient is about 60 years old.

Much older than you would assume, right?

Perhaps for this reason, word has spread that an inheritance can offer more value at younger ages. This concept drives the entire premise of the book Die With Zero. Older adults should aspire to give away much of their wealth during their lifetimes. Their heirs will benefit at more ideal times, and grantor will still be alive to witness the joy.

The most recent option for those who prefer this approach are “530A accounts.” They sound appealing: all children now have access to an IRA (individual retirement account). Until this year, a child needed to earn income to contribute to an IRA.

But the benefit to families — both the kids and their parents — isn’t so clear.

This biggest disadvantages lie in the messy tax treatment, which can get confusing. So let’s listen to a few different financial pros share their perspectives. First up, college planning expert Ann Garcia:

“A 530A is tax-deferred, not tax-free. You’ll owe ordinary income tax on earnings when money is withdrawn. If used for college, the distribution could also trigger the Kiddie Tax. And because contributions are made with after-tax dollars, you must track “basis” [editor’s note: the amounts you contribute]. Withdrawals are prorated between basis and earnings. For example, if you contribute $1,000 and the account grows to $5,000, each withdrawal is 20% tax-free basis and 80% taxable earnings.

Now here’s financial advisor and blogger Jesse Cramer:

“Your contributions themselves are after-tax. But as your contributions begin to create investment growth, that growth is considered pre-tax. This is clearly a negative feature compared to how most tax-advantaged accounts work.

In all other tax-advantaged accounts, the contributions and the growth receive the same tax treatment. If the contributions are after-tax (like a Roth or 529), then the growth is all tax-free at withdrawal. And if the contributions are pre-tax and deductible (like Traditional accounts), then fine, the growth can be pre-tax too.”

Finally, Sheryl Rowling, a CPA and writer for Morningstar:

“The core tax structure of the Trump account could prove costly. Since the Trump account is merely tax-deferred, all investment gains (growth, dividends, and capital gains) are taxed as ordinary income upon withdrawal in the future. So, for example, an 18-year-old withdrawing a substantial sum for college must include that amount in their income for the year. This large lump sum could push them into a higher tax bracket, significantly reducing the net value of their savings.”

A 530A account sounds like an exciting new opportunity to invest in a child’s financial future. And if you’ve maxed out every other account, maybe it is.

But if you’re still investing for your child’s education, a 529 college savings account will work just fine. And once your child starts earning income from yard work or babysitting, a Roth IRA would be a great choice.

If you’re eligible for the government’s $1,000 contribution, setting up a 530A account makes sense. But you may want to stop there for now.

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About the author: Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m the founder of Illumint and a financial advisor in Washington, DC. I specialize in financial planning for Millennials like you. As a Millennial father and Certified Financial Planner™, I empower our peers to invest with confidence and flexibility. If you’re new to Illumint, I’m glad you’re here – you now have access to free personal finance tips written specifically for Millennials. I encourage you to read, watch, or listen to the ideas I share about exchanging your money for memories with your friends and family. And then when you’re ready, please send me your thoughts & questions!