California Tax Treatment of “Trump Accounts”: What Parents, Employers, and Business Owners Need to Know

Recent federal legislation created a new type of account commonly referred to as a “Trump account,” enacted July 1, 2025. While federal law treats these accounts as a modified form of traditional IRA under IRC §408, California does not automatically conform to all federal tax changes.

Because California conforms to the Internal Revenue Code as it read on January 1, 2025, the state does not generally conform to provisions enacted later under the One Big Beautiful Bill Act. As a result, California’s treatment of these accounts differs significantly from federal treatment.

For families, employers, and high-income business owners, understanding the distinction is critical for proper tax planning in 2026 and beyond.

At Velin & Associates, Inc., CPA Los Angeles, we are closely analyzing how these differences impact our clients — from doctors and dental practices to creators, commerce entrepreneurs, and high net worth individuals.

What Is a “Trump Account” Under Federal Law?

Under federal law:

• Trump accounts are established pursuant to IRC §530A
• They are defined as a type of traditional IRA under IRC §408(a) with specific modifications
• They are owned by the child, not the parent or guardian
• Earnings are tax-deferred federally
• Certain employer and charitable contributions may be excluded from federal income
• A $1,000 pilot contribution for children born 2025–2028 is treated as a federal tax payment under IRC §6434

Federally, these accounts function similarly to IRAs, with growth deferred until distribution.

California Does Not Recognize Trump Accounts as Tax-Deferred

The California Franchise Tax Board (FTB) has taken the position that:

Because California does not conform to IRC §530A, Trump accounts are not recognized as tax-deferred retirement accounts for California tax purposes.

What This Means:

• Earnings are taxed annually in California
• Growth is not deferred until distribution
• The account operates more like a UTMA (Uniform Transfers to Minors Act) account for California purposes
• Kiddie tax rules apply

This creates a significant federal-state mismatch.

Annual Taxation of Earnings in California

Under California law:

• Earnings are taxable each year to the child
• The basis increases by the amount of earnings already taxed
• When the account converts to a traditional IRA at age 18, the California basis equals:

Fair Market Value at end of growth period – pilot contributions

This annual taxation may surprise families who assume IRA-style tax deferral applies at both levels.

Employer Contributions: Taxable in California

California does not conform to:

• IRC §128 (exclusion for employer contributions)
• IRC §139J (exclusion for certain tax-exempt or governmental contributions)

The FTB’s position is clear:

Absent specific federal guidance excluding these payments under IRC §102 (gifts) or the general welfare doctrine, these contributions are considered income under California’s conformity to IRC §61.

Practical Impact:

• Employer contributions are taxable income in California
• Income is taxable to the child, not the parent or custodian
• This may trigger kiddie tax considerations

Treatment of the $1,000 Pilot Contributions

California does not conform to IRC §6434. However:

• Because the federal pilot payment is treated as a payment against federal tax,
• The FTB has stated that California would not treat the pilot contribution as income under IRC §61

This is currently the only clearly favorable treatment under California law.

Examples:

Below are planning scenarios we are evaluating for our clients.

Example 1: A physician client establishes a Trump account for their newborn child and their medical corporation contributes annually.

Federally:

• Contributions may qualify for exclusion
• Growth is tax-deferred

California:

• Employer contributions are taxable income
• Earnings are taxed annually
• Kiddie tax may apply

For high earners near the 37% federal bracket and California’s top marginal rates, the state tax drag could significantly reduce projected growth.

This requires coordination between payroll, bookkeeping and tax services, and long-term planning.

Example 2:  A dental business owner considers offering contributions to employees’ children’s Trump accounts as a benefit.

California impact:

• Contributions are taxable wages to the employee’s child
• No California exclusion applies
• Additional payroll reporting complexities may arise

This makes cost-benefit analysis critical before implementation.

Example 3: A high net worth client opens accounts for three children.

Over 18 years:

• Federal growth compounds tax-deferred
• California taxes earnings annually

Result:

• Reduced compounding effect at the state level
• Increased annual reporting complexity
• Potential kiddie tax exposure

We analyze whether alternative planning vehicles (529 plans, UTMA accounts, trusts) may offer more favorable state treatment.

Example 4: A Shopify store owner, Amazon seller, or filmmaker wants to contribute through their S-Corp.

Issues to evaluate:

• Payroll treatment
• California income inclusion
• Effect on overall tax bracket
• Interaction with other planning strategies

For creators, TikTokers, and online entrepreneurs, planning must account for fluctuating income levels.

Planning Considerations for 2026

Because these issues will first materially impact 2026 returns, there is time for strategy — but not for complacency.

Key considerations:

• Annual California taxation of earnings
• Kiddie tax exposure
• Employer payroll reporting
• Interaction with high-income phase outs
• Long-term basis tracking
• Conversion to traditional IRA at age 18

These rules are evolving, and additional FTB guidance may be issued before filing season.

California vs Federal: Why Coordination Matters

This is another example of how California nonconformity creates complexity:

Federal:

• Tax-deferred growth
• Possible exclusions

California:

• Annual taxation
• Contributions generally taxable
• Separate conformity rules

Without proactive tracking, families could misreport income or miscalculate basis.

The Bottom Line

California will:

✔ Tax annual earnings in Trump accounts
✔ Tax most contributions (except pilot contributions)
✔ Treat income as belonging to the child
✔ Not recognize federal exclusions under §§128 and 139J

These differences make professional planning essential — particularly for business owners, healthcare professionals, and high-income families in Los Angeles.

At Velin & Associates, Inc., we help clients integrate retirement planning with broader tax strategy, business structuring, and compliance.

We provide forward-looking analysis — not just form filing. For more information about our tax planning services, contact us today: visit ourwebsite.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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