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TL;DR:

Trump Accounts are a new type of tax-advantaged savings account for children under 18 with a valid Social Security number, created under the One Big Beautiful Bill (OB3) signed into law on July 4, 2025 with accounts available on July 4, 2026. Children born between January 1, 2025, and December 31, 2028, receive a one-time $1,000 federal seed deposit from the U.S. Treasury. Families and employers can contribute up to $5,000 annually. Accounts must be invested in U.S. stock index funds, and when a child turns 18, the account automatically converts to a traditional IRA with standard withdrawal options.

A new federally backed savings account has arrived for American families, and if you have young children, it’s worth understanding.

Trump Accounts, established under the One Big Beautiful Bill (OB3) and signed into law on July 4, 2025, are designed to give children a financial head start from birth. With a $1,000 government seed contribution, annual contribution limits, and a clear path to a traditional IRA at adulthood, these accounts introduce a new variable into family financial planning.

We’ve broken down what Trump Accounts are, how they work, and how they stack up against the 529 plan many families already leverage.

What Is a Trump Account?

A Trump Account is a new type of individual retirement account (IRA) created specifically for children under the age of 18 who have a valid Social Security number. There are no income restrictions to open one, making these accounts accessible to a wide range of families.

The accounts were established under Section 530A of the Internal Revenue Code as part of the OB3 Act of 2025. Their primary purpose is to encourage long-term wealth-building from early childhood, with funds invested in U.S. stock index funds throughout the child’s minor years.

One important note: an existing IRA cannot be converted into a Trump Account. The account must be established fresh and titled specifically as a Trump Account by a financial institution.

Key Rules and Contribution Limits

The $1,000 Federal Seed Contribution

For children born between January 1, 2025, and December 31, 2028, the U.S. Treasury will deposit a one-time $1,000 pilot program contribution directly into the child’s Trump Account. This money is not paid directly to the family. Instead, it is treated as a tax overpayment refunded into the account and is protected from certain offsets.

Children born before 2025 and under the age of 18 are still eligible to open a Trump Account but will not receive the $1,000 government deposit.

Annual Contribution Limits

Beyond the government seed money, families, individuals, and employers can all contribute.

Here’s how the limits break down:

The employer contribution is particularly valuable because it is not counted as taxable income for the employee. If your employer offers it, you should take it! That’s free money compounding on your child’s behalf.

Investment Requirements

During the growth period, while the child is a minor, funds held in a Trump Account must be invested in eligible U.S. stock index funds, such as those tracking the S&P 500.

This is not a flexible brokerage account; investment options are limited by law during this phase.

Tax Treatment and Withdrawal Rules

Taxes around Trump Accounts are important to keep in mind. Check out these rules to keep your finances in order.

Parental and Family Contributions

Contributions made by parents, guardians, or other individuals are made with after-tax dollars and are not tax-deductible. That means they do not reduce your taxable income in the year you contribute.

However, because these contributions are made with money you’ve already paid tax on, they create what’s called tax basis in the account. 

When the child eventually withdraws those contributed amounts, that portion comes out tax-free. The earnings on those contributions, however, are subject to income tax and, depending on when and how funds are taken out, potentially an early withdrawal penalty.

Employer Contributions

Employer contributions function differently because they are not taxable to the employee when made. When withdrawn later, employer contributions and their earnings are subject to standard income tax, similar to a traditional pre-tax retirement account.

Distributions During the Growth Period

While the child is a minor (ages 0-18), distributions from a Trump Account are generally not allowed, with limited exceptions for qualified rollovers, excess contributions, and death of the account beneficiary. This is an important distinction from other savings vehicles, such as 529 plans, which allow more flexible access to qualified education expenses during childhood.

When the Account Converts to an IRA

On December 31st of the year before the child turns 18, the Trump Account officially converts to a traditional IRA. At that point, standard IRA rules apply, including the 10% early withdrawal penalty for distributions, unless an exception applies.

Some exceptions to the 10% early withdrawal penalty include the following, but note that ordinary income tax still applies to these distributions:

This means a child who saves consistently in a Trump Account from birth through age 18 could use those funds toward college, a first home, or eventually retirement—all with favorable tax treatment on the contributed portion. One of the Trump Account’s unique benefits is that although it follows traditional IRA rules and provides tax-deferred growth, contributions made during the growth period (ages 0–18) are tax-free upon withdrawal. For more on how Roth and traditional IRA strategies fit into your family’s broader plan, read our guide to the Roth IRA.

If you make after-tax contributions to a Trump Account, be sure to work with a CPA and track those contributions carefully using IRS Form 8606. This form establishes your tax basis and ensures that contributed amounts are not taxed again upon withdrawal.

Trump Accounts vs. 529 Plans

For many families, the natural question is: how does a Trump Account compare to a 529 plan, and should I use one instead of the other?

The short answer is that they serve different purposes and can work well together. Here’s a breakdown of each.

529 Plans

A 529 is a tax-advantaged savings account designed primarily for education costs. Contributions are made with after-tax dollars, and the account grows tax-deferred. Withdrawals are tax-free when used for qualified education expenses.

Key features include:

Trump Accounts

Trump Accounts are better understood as a long-term wealth-building tool that begins in childhood. They are not designed primarily for education, and access before adulthood is limited.

Key features include:

Which Is Better?

If your primary goal is saving for education costs, a 529 plan remains a strong and flexible choice, particularly given the Roth IRA rollover option for unused funds and its broader investment menu.

If your goal is long-term wealth-building, a Trump Account offers a compelling head start, especially when the $1,000 federal seed and employer contributions are factored in.

For many families, especially those with children born between 2025 and 2028, the right answer may be both.

Key Considerations for Families

Before opening a Trump Account or adjusting your savings strategy, a few practical items are worth keeping in mind:

  1. Start early. The earlier contributions begin, the longer the account has to compound. This is the most impactful variable available to any family.
  1. Take the free money. If your child qualifies for the $1,000 federal seed contribution, open an account and claim it. Similarly, if your employer offers a Trump Account contribution, treat that as part of your total compensation.
  1. Track your tax basis. If you make non-deductible after-tax contributions, work with a CPA to file IRS Form 8606. This protects you from double taxation on withdrawal.
  1. Consider both accounts. A 529 plan offers education-specific flexibility that a Trump Account does not provide during the growth period. Using both in coordination may give your family the most options.
  2. Watch for more guidance. The IRS and Treasury are still issuing regulations on Trump Accounts. Final rules on contributions, reporting, rollovers, and withdrawals are expected over the next year. Stay informed as guidance continues to evolve.

Our team works with families and individuals to build plans that account for education savings, retirement readiness, and generational wealth.

Final Thoughts

Trump Accounts represent a genuinely new option in the family financial planning toolkit. The combination of a federal seed contribution, employer contribution benefits, and a clear long-term wealth-building structure makes them worth understanding, even if the regulations are still taking shape.

The most important decision is simply to start. Whether through a Trump Account, a 529, or both, building the habit of saving early on your child’s behalf is the highest-impact move available to you right now.

If you’re not sure where Trump Accounts fit into your overall financial plan, a conversation with an advisor can help clarify the tradeoffs. The BIP Wealth team is here to help you make the right decision. Contact us today to learn more about how these accounts could work for your family.

Frequently Asked Questions

What are Trump Accounts?

Trump Accounts are a new type of individual retirement account for children under 18 with a valid Social Security number, established under the One Big Beautiful Bill Act signed into law on July 4, 2025. They are designed to help families build long-term wealth, with a one-time $1,000 federal deposit for qualifying children born between 2025 and 2028, annual contributions of up to $5,000, and mandatory investment in U.S. stock index funds. At age 18, the account converts to a traditional IRA.

How do I open a Trump Account?

Parents or guardians can open a Trump Account by filing IRS Form 4547 along with their federal tax return. An online application tool is expected to go live at trumpaccounts.gov. A financial institution will receive the funds and activate the account. Only one Trump Account can be established per child, and it must be titled specifically as a Trump Account. Existing IRAs cannot be converted.

When can I open a Trump Account?

Accounts can be opened in 2026 by filing IRS Form 4547 with your 2025 tax return. Contributions from individuals and families cannot begin until July 4, 2026. The $1,000 federal seed contribution will be deposited by the Treasury for eligible children once the account is established.

Who qualifies for Trump Accounts?

Any child under 18 with a valid Social Security number qualifies to open a Trump Account. There are no income restrictions. The one-time $1,000 federal seed contribution is available for children who are U.S. citizens born between January 1, 2025, and December 31, 2028. Children born before 2025 can still open and benefit from a Trump Account, but will not receive the $1,000 government deposit.

This article is intended for informational purposes only and does not constitute legal, tax, or investment advice. Investors should seek tax advice based on their particular circumstances from an independent tax advisor, as tax laws are subject to interpretation, legislative change and unique to every specific taxpayer’s particular set of facts and circumstances.

Copyright 2026 BIP Wealth. All rights reserved.

A summary of key insights from BIP Wealth Chief Investment Officer Eric Cramer’s recent webinar on the state of private credit and what it means for investors.

If you’ve been reading the financial news lately, you’ve probably seen some alarming headlines about private credit. Words like “crisis,” “redemptions,” and “growing concern” seem to be everywhere. However, the gap between what the financial media is reporting and what we’re actually seeing in the space has rarely been wider.

Here’s what you need to know.

What Is Private Credit, Anyway?

At its core, private credit is simply lending that doesn’t happen on a public exchange. It’s the original business of banking—you deposit money, and the bank makes loans with it. Any debt that isn’t publicly tradable qualifies as private credit, whether it’s a single loan or a bundle of them.

Think of it this way: if you’ve ever had a mortgage, a car loan, or a business line of credit, you’ve been on the borrowing side of private credit. The investment side just means you’re the one providing that capital and earning interest in return.

I like to tell people that one of the best ways to learn about private credit is to watch Mary Poppins. I’m serious. The film is set in 1910 England and the family’s last name Banks, which is no coincidence. There’s even a musical number about how the bank takes young Michael’s two pence and puts it to work making loans. That’s essentially a musical number about private credit.

And here’s the part I love: in the sequel, set decades later during the Great Depression, Michael’s money has stayed in the bank all that time. It’s grown enough to pay off his mortgage and rescue his family financially. It’s a memorable illustration of the potential value of a long-term investment horizon.

Why Today’s Headlines on Private Credit Are Misleading

Several recent news stories have painted a troubling picture of private credit, but a closer look suggests a more nuanced reality. 

When Blackstone’s private credit fund saw increased redemption requests, management and ownership responded by putting their own money into the fund—a classic vote of confidence. The media, however, framed it as a crisis. When Cliffwater’s interval fund experienced higher-than-usual redemption requests, it wasn’t because the loans were in trouble, it was simply because Cliffwater is the easiest place for investors to access cash quickly. And when Blue Owl sold a $1.27 billion package of loans, they sold at exactly the price they were carrying those loans on their books—99.7 cents on the dollar—which actually validated the strength of their portfolio. 

In each case, the underlying investments were performing well. The stories were about investor behavior, not investment quality.

It’s worth noting that on the institutional side, capital continues to flow into private credit. The headline-driven anxiety has been largely concentrated among retail investors.

Where the Real Pressure Is Coming From

So why are some retail investors looking for cash in the first place? The answer lies mostly outside of the private credit space.

Tech stocks experienced significant sell-offs in early 2025 and again in Q1 2026. The S&P 500 IT sector was down over 9% in the first quarter of 2026 alone. Meanwhile, crypto has been hit even harder, falling roughly 50% from its highs. Many of those investors were highly leveraged, meaning they had borrowed money to invest. When their bets went south, they needed to find cash somewhere, and private credit was one of the safest, most stable places they had money sitting.

In other words, the redemption activity in private credit isn’t a sign that private credit is broken. It’s a sign that other parts of the market are under stress, and investors are tapping their most reliable accounts to cover losses elsewhere.

Not All BDCs Are Created Equal

Part of what may be fueling confusion is a misunderstanding about a term you may have seen: BDC, or Business Development Corporation. There are publicly traded BDCs, the kind you can buy and sell every minute in a brokerage account, just like a stock, and then there are privately traded BDCs, which is the type BIP Wealth utilizes in some client portfolios.

The publicly traded versions tend to be more speculative in nature, often carry higher fees (in many cases 5–6% per year), and a number of them trade at significant discounts to their net asset value. In the first quarter of 2026 alone, some of these publicly traded BDCs experienced losses of 25–30%. It’s possible that many of the journalists writing alarming private credit headlines are looking at these publicly traded BDC vehicles—which are not part of BIP Wealth’s current private credit strategy—and conflating them with the broader private credit market.

The “SaaSpocalypse:” Real Threat or SaaSquatch?

One of the buzzwords making the rounds is “SaaSpocalypse”—the idea that artificial intelligence will wipe out the Software-as-a-Service industry. Since many private credit loans are made to software companies, this has raised some eyebrows.

The reality is more complex. Yes, AI will change the software landscape over time. Some SaaS companies may lose customers who can replicate certain functions using AI tools. But many SaaS companies are themselves becoming AI-enabled, and any major disruption will take years, not months, to play out.

More importantly, if you’re worried about SaaS companies struggling, the equity investors (the people who own stock in those companies) stand to lose far more than the lenders. Private credit investors sit higher in what’s known as the “capital stack,” meaning they get paid before equity holders. If a company’s value declines, the stockholders absorb the losses first.

Understanding Your Position: The Capital Stack

Knowing your position in the capital stack is perhaps the most important concept for private credit investors to understand. When you invest in private credit through BIP Wealth, you’re primarily in “senior secured” loans. That means your claim on a company’s assets is near the top of the priority list, ahead of subordinated debt, convertible notes, preferred equity, and common stock.

When I reference a stock like Microsoft dropping a certain percentage, I’m showing you what happened to the common equity, which is at the bottom of the capital stack, where the greatest risk of loss typically resides. Senior secured lenders sit near the top. If a company runs into trouble, senior secured debt holders are generally among the first to be repaid. The equity investors—the ones whose stock prices you see on CNBC—bear the greatest risk. And in many cases, those private equity investors will actually inject more capital into a struggling company to keep it healthy, which makes the senior secured loans even safer.

What Are Evergreen Funds, and Why Do They Matter?

BIP Wealth primarily uses “evergreen” private credit strategies. Unlike older models that required periodic capital calls and had unpredictable timelines, evergreen funds work on a “fund and done” basis. You invest when you’re ready, you earn income along the way, and there are regular opportunities to withdraw.

This structure is becoming the new standard across the industry. In 2025 alone, nearly 80 new evergreen funds launched. Institutions like university endowments and insurance companies are adopting them too, not just individual investors. It’s a more accessible, more transparent, and often lower-fee way to participate in private credit.

The strategies many of you are familiar with, including those managed by firms like LAGO, Monroe, KKR, Barings, and Cliffwater, are the types we’ve evaluated through our due diligence process and offer to clients. Each may serve a slightly different role in a diversified private credit allocation, depending on an investor’s individual circumstances.

Redemption “Gates” Are a Feature, Not a Flaw

You may hear that certain funds are “gating” redemptions, meaning they’re limiting how much investors can withdraw in a given quarter. This sounds alarming, but it’s actually a protective feature, similar to an early withdrawal penalty on a bank CD.

These funds are designed to honor a set percentage of redemption requests each quarter (typically 5–7.5%). If requests exceed that threshold, everyone receives a proportional share. The reason is simple: managers don’t want to sell loans at a discount just because some investors are in a rush. That would hurt the long-term investors who are staying put.

Most of the underlying loans in these portfolios mature in three to four years. If a fund simply stopped making new investments and let everything run its course, it would all convert to cash naturally. There’s no fundamental liquidity problem, just a temporary mismatch between redemption requests and the pace at which loans mature.

What Should You Expect Going Forward?

Continued communication from BIP Wealth. The BIP investment team monitors these markets daily, reads hundreds of articles, and is in constant contact with fund managers. As long as private credit remains in the news, clients can expect regular updates.

More headlines about redemptions, non-accruals, and PIK rates. Non-accruals (borrowers temporarily not making interest payments) and PIK rates (pay-in-kind, where you receive additional principal instead of cash interest) are normal features of lending. For the strategies BIP Wealth recommends, these metrics remain stable and healthy.

Some minor pricing adjustments. As credit spreads widen—meaning new loans are being made at slightly higher rates—existing loans may be marked down slightly to reflect the new market rate. This doesn’t mean the loan is in trouble; it’s simply a bookkeeping adjustment. And the good news is that new investments going into these funds will earn those higher rates, which benefits long-term investors.

Higher yields ahead. The same market dynamics causing short-term noise are actually creating better opportunities. Funds that were projected to yield 9% may now deliver 10% or more, as lenders can command better terms from borrowers.

Possible gating of redemptions. As I explained above, this is a structural feature designed to protect shareholders from forced selling at unfavorable prices. We view it as a prudent risk management tool, not a warning sign.

The Bottom Line

Private credit, particularly the senior secured, diversified, evergreen strategies that BIP Wealth recommends, remains one of the most stable and attractive corners of the investment landscape. The headlines are driven by a combination of media sensationalism, stress in unrelated markets like tech stocks and crypto, and a fundamental misunderstanding of how private lending works.

I’ll leave you with this: Michael Banks left his two pence in the bank, and in the story, it made all the difference. By the time the sequel rolled around decades later, that small investment had grown enough to pay off his mortgage. While fiction isn’t a substitute for financial analysis, the principle of maintaining a long-term perspective, particularly during periods of short-term volatility, has historically served investors well. The investors who stay the course tend to come out ahead.

If you have questions about your own private credit holdings or want to discuss your portfolio, reach out to us to connect with a BIP Personal Wealth Advisor. They’re engaged in this analysis on a regular basis and are ready to discuss the choices that may be right for your individual circumstances and risk tolerance.

Want to Explore Private Credit Yourself? Start Here Using AI.

One of the best ways to build confidence in any investment is to understand it on your own terms. For those who want to dig further into private credit, here are a few prompts you can use with AI tools like ChatGPT or Claude to explore the data behind the strategies we use at BIP Wealth:

And here’s a bonus tip: Once you get an answer, ask, “What would be some other good questions for me to ask about private credit?” It will generate a whole new set of prompts to keep learning from. Just be mindful—it’s easy to spend an afternoon going down that rabbit hole.

This blog post is a summary of a recent BIP Wealth client webinar and is intended for informational purposes only. This post should not be construed as investment advice, nor a recommendation or solicitation to buy or sell any security. Ideas contained within this post regarding the market or market conditions represent the views of the author or the sources cited and are subject to change without notice.

All investing involves risk, including the possible loss of principal. Private credit investments involve additional risks, including illiquidity, limited transparency, credit risk, interest rate risk, and the potential for restrictions on withdrawals. Past performance is not indicative of future results. There can be no assurance that actual outcomes will match any expectations described in this post.

Investors cannot invest directly in an index. Index performance does not reflect fees, expenses, or transaction costs associated with the management of an actual portfolio. Data from third-party sources (Morningstar, PitchBook, Standard and Poor’s, MSCI) is believed to be reliable but BIP Wealth cannot guarantee accuracy. Forward-looking statements, estimates, and forecasts are based on assumptions and are not guarantees of future performance.

Investors should consult with their Personal Wealth Advisor to determine what is appropriate for their individual circumstances and risk tolerance. BIP Wealth, LLC (“BIP Wealth”) is registered with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC and other state securities authorities as a registered investment adviser does not imply a certain level of skill or training.

Copyright 2026 BIP Wealth. All rights reserved.

Private Credit is a large and growing category in the private market investing landscape. With exits harder to come by lately, more companies are adding debt to their capital structure (for several reasons that include avoiding direct dilution of equity). The dramatic increase in importance of private credit to the funding of companies has also led to a proliferation of funding vehicles that investors might participate in. New managers are popping up almost daily, and new vehicle types are emerging too. Co-investments, drawdown funds, public BDCs, private BDCs, and now Interval Funds are all seeing growth. These vehicles are making it easier for retail investors to include private credit in their portfolios.

In the broader credit markets, several trends are unfolding that could have a negative impact on some parts of Private Credit. 

First, base rates are falling. The Fed has now lowered the overnight rate, as it should, to remove us from a restrictive stance. Many private credit strategies use floating rate loans, so falling rates will naturally lower yields. Investors should keep in mind that their return is a combination of the yield and the always changing price. Minor fluctuations in price are normal, and investors can expect yields to be lower in 2026 than they were in 2025. The long end of the yield curve is falling too, as the Fed ends quantitative tightening (no longer dumping bonds on the market to decrease its balance sheet, which was draining liquidity out of the system). We are also near a multi-year low point for credit spreads, reflecting that investors are getting paid less to take credit risk.

The combination of new money coming into Private Credit, along with a changing rate structure and price for credit risk, will certainly influence Private Credit in the larger sense. But the devil is in the details, and broad pronouncements that read something like “private credit is in trouble” are not accurate, not helpful, and outright confusing to our clients. 

At BIP, we believed this would eventually happen, and we welcome the market pressure. It’s our chance to prove we know what we’re doing. This is the perfect time to show how real knowledge is so much more valuable than just knowing the headlines. Our clients are counting on us at BIP Wealth to get this right. And we have already done our homework to make sure we have a variety of evergreen strategies that we expect to do well in a variety of economic conditions.  

Here are several important ideas you should know:

1. Recent headlines about private credit BDCs getting into trouble are referring to publicly traded BDCs and not the privately traded BDCs that BIP Wealth presents to our clients. 

Business Development Companies are entities that meet certain regulatory requirements created in 1980 and are close-end funds that distribute 90% of income. We track about 3 dozen publicly traded BDCs, and 2025 returns through 12/31/25 range from +16.75% to -27.38%, with more in negative territory than positive. This is markedly different from the returns we are seeing in the vehicles we’re using, and you may notice that few survived the pullback in credit markets during 2022 unscathed.

Table showing 2022–2025 annual returns for publicly traded BDCs, highlighting negative performance in 2025
Original data from Morningstar as of 12/31/2025

2. These publicly traded BDCs that we don’t own often trade in BSLs (Broadly Syndicated Loans), which BIP’s strategies almost completely avoid.

BSLs tend to be of lower quality and lack the covenants and remedies that are the hallmark of our strategies. BSLs are originated by banks, securitized, and then traded daily. Some might equate this to juggling chainsaws when credit markets turn sour—you want to drop them as quickly as you can to avoid getting your hand cut off.

3. The privately traded BDCs that BIP uses have several commonalities:

4. We also invest in individual deals, or “co-investments.” 

These are, by nature, not diversified. But here again, the details are important. Many are convertible notes, which in reality are equity deals that pay a yield to the investor and sit above other equity investments in terms of their priority. We have a long history of enjoying some of our best equity returns from these investments.

5. By offering several carefully selected managers that are working at what we believe is the safer end of the private credit markets, we are in the enviable position of being able to stand back and watch what happens to the rest of the market if things turn sour.

We expect to be able to prove to our clients that your trust in us is warranted. But this comes with the obligation to explain our prudent process in a world of scary headlines. If the risky end of the private credit market does start to experience significant stress, some of our clients may become concerned.

If you would like to learn more about our Private Credit strategies and if they might be a fit for you, the BIP Wealth team is here to help. Contact us today to be connected with a trusted advisor.


This post is provided for informational purposes only. Specific investments may not be suitable for all investors and no offer or recommendation of any investment or investing strategy is intended or implied by your choosing to read this post. Privately traded offerings may only be available to investors who meet certain qualification statuses.

This material is not intended to be relied upon as a forecast or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict the performance of any investment. Past performance is no guarantee of future results.  All investments involve risks including loss of principal.

Creating and maintaining an investment portfolio that provides the best risk/return profile is the obsession of many investors. More return with less risk is obviously the goal. The stakes are high, which is why professionals and academics alike get into heated debates about competing models.  A model that produces return results superior to others by mere fractions of a percentage point without more risk is considered a resounding success. That’s all good for investors, but sometimes it just isn’t the most important issue. That’s where Roth IRA strategies come into play. In this blog, we’ll explain how Roth IRA strategies, including Roth Simple IRAs can benefit investors.

Roth IRA Strategies Can Create Higher After-Tax Return

In the real world (as opposed to a deliberately simplified financial model), the tax drag caused by investing decisions can have a much greater effect on the investor’s after-tax investment return.  After-tax return is the money left over after taxes are paid that can actually be spent, and different types of investment accounts offer different tax treatments for different assets. For instance, capital gains earned within a traditional IRA (where distributions are taxed at the investor’s marginal income tax rate) may face twice the tax drag once distributed from the IRA when compared to a taxable account (where long-term capital gains receive a preferential rate). Traditional IRAs do provide for tax deferral (no taxes due along the way on income or gains earned) and many times the dollars inside our IRAs came from tax-deductible contributions either to the IRA or the 401k while we accumulating those dollars, so there are benefits for consideration in asset location and utilization for these pre-tax and tax deferral strategies within our overall plan to maximize our after-tax returns. All too often investment managers ignore the practical realities involved in maximizing the after-tax investment return through an asset location strategy.

When an investment manager can create a higher after-tax return for investors by minimizing tax drag, that’s referred to as “tax alpha” (where alpha means more return without more risk). Roth IRA strategies, when done right, are the holy grail of investment accounts if the goal is to increase tax alpha. If handled properly, Roth IRA conversions may never face any taxes. In the years since 1998, when the Roth IRA was launched, Congress has steadily liberalized the constraints that prevent many affluent investors from making Roth IRA strategies a large percentage of their portfolio.

This steady change in the tax rules has meant that investment managers can create more tax alpha for their clients if they are aware of all the techniques at their disposal. Sometimes this requires close coordination with a client’s tax advisor. Still, these generally aren’t considered risky maneuvers and a good tax advisor usually gets pretty excited to see that their client is working with an investment manager who isn’t making the tax bill even higher than it should be.

How to Boost Your Roth IRA Strategies

The most basic technique for increasing the amount of assets in a Roth IRA strategy is for the investor to make contributions each year. The investor, or their spouse, must have compensation for the year, so investors in retirement are usually out of luck. As of 2023, the contribution limit is up to $6500, with folks 50 and over able to add an additional $1000 as a “catch-up” contribution. This contribution limit is increased to $7000 for 2024, with the “catch-up” contribution for folks 50 and over remaining at the additional $1000.

Many employer-sponsored 401ks now also offer the ability to make Roth contributions, where the deferral limits for employees are $22,500 for 2023 and $23,000 for 2024, with the “catch-up” amounts for folks 50 and over being $7500. It’s worth noting that there may be ways for you to make contributions above these levels on an after-tax basis depending on your specific plan and how much your employer contributes to your plan in the form of matching. These details are a touch more complicated as the IRS has limits on how much can be contributed in total to an individual’s 401k. We’ve touched on this in a previous post and won’t walk through the full details here since we are focusing on IRAs.

The biggest change to help affluent investors was when the income limits for Roth “conversions” went away. When Roth IRAs were first introduced, Congress wanted to make sure that folks at higher income levels couldn’t benefit from this new type of investment strategy, so income limits were added. Lawmakers looking to plug budget gaps realized that a Roth IRA conversion requires the investor to pay taxes on the balance of the assets (minus any non-deductible contributions known as “basis”).

Challenges of Roth IRA Strategies

One big administrative trap remains, however, and we’ve seen it catch investors, investment advisors, and even CPAs who didn’t understand the rules. It’s simple: the IRS considers all of your IRAs to be just one IRA. So, if one IRA is full of post-tax/non-deductible contributions, you can’t just convert that one IRA to a Roth IRA strategy to minimize your tax burden.

Here is an example:

Some naïve tax filers will try to convert IRA #1 to a Roth IRA strategy, thinking that they will only pay tax on the $10K in earnings. The $20K converts tax-free, right? Wrong! The IRS says that the tax filer has only one IRA, worth $100K, with $20K in non-deductible contribution basis that isn’t taxed upon distribution or conversion. Any contribution is a pro-rata mix of the total of all IRA assets. So a $30K conversion pulls $6K from the basis and $24K from other sources that are taxable. When the tax filers try to only pay taxes on $10K instead of $24K, then penalties likely result.

When considering whether or not to convert an IRA to a Roth IRA strategy, it’s important to decide if the intention is to eventually convert all of the IRA. The future benefit of tax-free returns is impossible to estimate with certainty, whereas the bill for converting is pretty easy to calculate. But there is one extra technique available once all of the IRA is converted, and that is the so-called “back door Roth IRA”.

So the basic flow of funds and paperwork is this:

First, cash from your bank account goes into your IRA as a non-deductible contribution. This requires that you file Form 8606 to document that there is basis. It results in the IRA custodian sending you and the IRA a Form 5498 to document that you made a contribution (but beware, you probably won’t get this until June of the next year).

Then the cash in the IRA gets moved into the Roth as a conversion. This needs to be documented on your Form 1099 when you file for that tax year. The conversion from the IRA results in your custodian sending you a Form 1099-R to show that the funds left the IRA (you will get this in January of the next year). It also results in your custodian sending you yet another Form 5498, but this time from the Roth IRA strategy that received the funds.

At the end of this you essentially put cash from your bank account into your Roth IRA, but beware of the paper trail and notated steps along the way. The June time frame to get some of the forms causes many filers to make mistakes. But it stems from the fact that custodians wait until after April 15 of the following year to begin producing tax forms to document any money that was put into an IRA. Informing your tax advisor of the steps you went through is crucial, as they may not be able to see the trail just by providing them the 1099-R provided by the custodian.  

You may also have the ability to utilize Roth conversion strategies within your employer-sponsored 401k as well! These considerations and steps are a bit different than described above but follow a similar process. (Important to note that Roth contributions and conversions are not available in all employer-sponsored plans, and the process for requesting Roth conversions for each plan will likely also be different if available). Certain rules within the plan around how/when conversions can occur (automatic, once a quarter, etc.), what you must do to initiate the conversion, and a key driver around making after-tax contributions are all important and something we’ll cover in a separate post.

At BIP Wealth we always encourage our clients to get the best tax advice they can find from a qualified tax advisor. We don’t give tax advice per se, and when we have an idea that could increase your tax alpha we like to coordinate with you and your tax advisor. And sometimes the benefits you reap are even more significant than the investment returns. Contact us to learn more about how a Roth IRA strategy could benefit you in the long term.

This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. Indices are not available for direct investment. 

FAQs

How are Roth IRA contributions handled for tax purposes?

Roth IRA contributions are made with after-tax dollars, so they’re not tax-deductible.

How are Roth conversions handled for tax purposes?

Roth conversions are considered a taxable event, as they are taxed like a distribution from your traditional IRA but do not impose any penalty for occurring prior to 59 ½ . The taxable portion on any Roth conversion would be any portion not previously taxed (previously deducted contributions and any earnings on deductible or non-deductible contributions), so after-tax (non-deductible) basis would not be included.

What is basis of Roth IRA conversions?

The basis of a Roth IRA conversion is the amount of the conversion that is not subject to tax, typically representing after-tax/non-deductible contributions made to a traditional IRA before converting to a Roth IRA strategy. Non-deductible contributions are tracked using form 8606 and an important step in the process.

What does Roth stand for?

“Roth” doesn’t stand for a series of words; it’s named after Senator William Roth of Delaware, who introduced the Roth IRA legislation.

It’s one thing to have a vision for your wealth. But, in our complex financial landscape, where things can change in a heartbeat, it’s just as important to have a plan in place that takes a comprehensive approach. This is where the concept of holistic financial planning comes into play. Beyond taking a traditional view of finances—one that focuses solely on single aspects like investments, savings, or retirement—holistic planning has a more human approach and embraces a person’s lifestyle, priorities, and goals. It weaves together every financial thread of their life—from tax planning to investments to insurance needs—ultimately aligning each aspect with their unique financial circumstances. Because of this, holistic planning can not only enhance financial decision-making but can also help to foster peace of mind in the long term, knowing that every part of your financial life is working in harmony to potentially achieve long-term goals.

So, why might holistic wealth management be important to your success? In this blog, we’ll break down the top five reasons to implement a holistic financial strategy in navigating toward a secure, prosperous financial future.

TOP 5 WAYS HOLISTIC FINANCIAL PLANNING CAN BENEFIT YOU

1. Alignment with Personal Goals

For many, financial planning means more than just short-term stock returns. Perhaps you’re hoping to buy your dream home or car. Maybe you want to fund your child’s college education. You may even want to start a small business. Whatever the case may be, holistic planning can help you align with those goals in a more efficient way.

Now, what happens if your goals change? As you get older or the financial markets evolve, can holistic planning adapt to your new situation? Yes. Holistic wealth management from a firm like BIP Wealth can provide clients with a plan that is prescribed to be resilient to sudden changes such as dips in the stock market or higher taxes. Through these personalized plans, clients have the opportunity to establish a more resilient portfolio and lifestyle that can adapt to their evolving needs.

2. Flexibility

As life and the financial markets change with time, so should your wealth planning. A key value of holistic planning is its versatility, allowing both advisors and clients to make constant changes to target specific goals if needed. This flexibility is especially important for analyzing the global markets. The below graphic takes a look at the percentage of annual returns across a number of the world’s key markets, solidifying the need for a broadly diversified portfolio that can adapt to changing conditions.Source: Dimensional 

Through a holistic financial plan, you may be able to achieve higher or more consistent returns as you focus on diversifying your portfolio to be more flexible. A study from Dimensional, a financial investment firm, found that from 1990-2020, investors looking to yield higher returns from global equities as well as global intermediate government and credit bonds would have performed better with holistic planning in most instances.

3. Holistic Planning Can Keep You Adaptable

While thinking about your dream retirement or financial future can be an exciting time, it is also important to keep in mind the many risks that are associated with investing. Say you have a large chunk of your money invested in a single stock. At any given moment, that stock’s value could plummet, taking your hard-earned capital with it. That’s why a core element of a holistic planning philosophy should hold a somewhat pessimistic projection of the future. By actively thinking about how to properly react to inevitable market fluctuations, tax increases, or unexpected life shifts such as job loss, relocation, or injury, you can potentially limit your overall risk and set your portfolio up for a more robust future.

4. Long-term vs. Short-term

While it can be tempting to pursue high-risk, high-reward investments with quick payouts, holistic planning takes into account several other factors, especially when focusing on a sustainable, long-term gain, including one’s desire for a comfortable retirement or generational wealth transfer. Think of this like sitting in rush hour traffic, for example. You may quickly switch to a lane that is going faster only to find yourself at a standstill soon after. Although you might have temporarily moved ahead of some cars, they may end up beating you in the long run.

Holistic wealth management can include comprehensive plans that are built around passive income sources that drive a client’s retirement years or figure out the best way for them to enjoy their current lifestyle without having to continue their working days. By considering a client’s complete financial situation, holistic wealth management may help them accomplish more than just simple returns. Over the course of years, this system may help turn that dream retirement into an actual reality.

5. Holistic Planning May Limit Tax Burdens

Finally, a component of a comprehensive holistic plan may aim to manage, control, and reduce your tax liabilities wherever possible. This is very important for estate planning and generational wealth transfers, as figuring out areas to reduce your tax burden can make a major difference over the years.

THE BIP WEALTH APPROACH

Our holistic planning formula blends Nobel Prize-winning empirical research with savvy integrations of alternative investments. Through our carefully-personalized plans, we’ve helped our clients unlock financial opportunities in both private and public markets that have historically been reserved for the ultra-wealthy.

At BIP Wealth, you’ll have access to a team of experts who will be with you and your family at every step of your financial journey. If you’re looking for a unique approach to holistic wealth planning, you can browse our offerings—from private equities, private credit offerings, public market investment plans, and covered call strategies.

FAQs

What is holistic wealth planning?

Holistic wealth planning does not focus solely on singular investments, instead determining a person’s current financial situation, lifestyle, and ultimate goals to create a long-term plan for retirement, estate planning, investments, and more.

Why is holistic planning important?

From potentially limiting financial risk to better aligning with personal goals, holistic planning is important for those who are looking for more than just short-term investment returns.

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