Self-employed owners can't use employer money for their kids' Trump accounts

Ed Slott's IRAHelp has parsed the proposed IRS regulations on employer contributions to Trump accounts, released August 10, and the key takeaway is a split: a sole proprietor can put deductible employer money into an employee's child's account, but not into his own child's. That asymmetry is what will change a planning conversation.

Under the proposal, employers may contribute to the Trump account of an employee or an employee's dependent, but only until the end of the year the beneficiary turns 17 — the IRS's 'growth period,' according to the analysis. The first $2,500 contributed per employee each year escapes current taxation; the contribution and its earnings are taxed when distributed. Any amount above $2,500 is taxable to the employee in the year it is made. Both dollar limits are indexed for inflation.

The cap is per employee, not per child. An employer with one employee who has two children can divide the $2,500 between the two accounts, but cannot double it. Employer contributions also count against the $5,000 annual limit that applies to contributions from parents, grandparents and others during the growth period. So company money and family gifts compete for the same space.

The guidance requires employers to complete several administrative steps for each contribution, and Ed Slott's IRAHelp says those steps are likely to be challenging for a small employer. The analysis does not enumerate the steps, but the compliance burden is set against a maximum deduction of $2,500 a year per employee.

The self-employed exclusion is the harder trap. A sole proprietor or a partner cannot make an employer contribution to a Trump account for his own child, though he can make one for an employee's child. He can still make a personal contribution to his child's account, but personal contributions are not deductible. Employer contributions, by contrast, are a business expense. The result: the deduction exists only for someone else's children.

The proposal also allows salary reduction contributions, but only into a dependent's account. An employee cannot use salary reduction to build his own Trump account. The rules aim the money at the next generation, not the worker.

For the owner, the math is simple. The deduction is unavailable for his own family, so the only way to get a business-expense deduction for a child's account is to put the money into an employee's child's account. That makes the provision a retention perk rather than a family savings tool. At the 37% top federal rate, a $2,500 deduction saves $925 a year per employee, and the distribution is taxed later.

None of this is final. The proposed regulations are open for comment, and the compliance requirements could change. Advisors can sketch the structure now, but a client should not build payroll infrastructure around a proposal. For most small employers, the rational move is to wait for the final rules and then decide whether a $2,500 benefit is worth the new reporting regime.