In this letter
- This Just In!
- Extra Credit: The New Thing on the Supply List
- DROP and Give Me Ten!
- Other Considerations for the 530A
The principal said, "We're happy to take your children off your hands." Blunt, but effective. He was welcoming the parents back to school on the first day of school. It's hard to believe that the summer is already over. It felt like it was just days ago that we were trying to make sure we had everything lined up for the break. And just like that, our little boy walked into his kindergarten class, cool as a cucumber. Goodbye Montessori school tuition, hello free school lunches. You try to come up with a better joke when you're choking back tears because your firstborn is growing up.
And that's just it. They grow up and we need to plan for that even when it's hard to plan past next week. This is where grandparents often come in. They've been there, and they have the foresight to know that beyond all of the soccer practice and dance recitals, there's an entire life that we can help these little people prepare for. And after the handed the kids back after an afternoon or weekend with the kids, they have a fully functioning brain again. So below, in the Extra Credit section, is something that you can take to those parents to help them out a little bit. After that, I will give you something that you can do right now to prevent your information from getting sold again and again.
But first, some breaking news!
This Just In!
We interrupt your regularly scheduled newsletter to give you some breaking news. Just days before I was about to publish this newsletter there was a big announcement by Altruist. This is why the newsletter is a few days later than normal. I'm going to pretend that you noticed. Vanguard has announced that they will be acquiring Altruist. This is the same Vanguard that you all know and trust. We currently use many of their funds throughout our investment strategies. The origins of Vanguard started with Jack Bogle, whose name is now synonymous with low-cost investing.
Pending regulatory approval, Altruist will be operating under the Vanguard umbrella. This will provide additional stability to the custodian that we use to house your investments. The CEO of Altruist is staying on board and will continue to operate independently under separate branding. As many of you know, I am familiar with these kinds of corporate changes, having seen it from the inside before. My opinion is that this is a great marriage. Both companies have their hearts in the right places with a goal of providing products and services that ultimately help investors do well.
What kind of direct impact will this have on you? I suspect not a whole lot that you will notice. One of the things that drew me to Altruist initially was their ongoing commitment to continuously improve their services for me as an advisor. This will continue and now with the backing of the second largest asset manager in the world. So the march continues, but now with a very powerful ally to help us pave the way ahead.
Extra Credit
The New Thing on the Supply List
Last summer's tax law created a new kind of account for children. The official name is a Section 530A account. You have probably seen it called a Trump Account, and I'll use the official name from here on because any other name is just a branding exercise.
Any child in this country under 18 with a Social Security number can have one. The child owns it. A parent or guardian runs it until the child grows up. Money can go in from almost anyone, parents, grandparents, family friends, even employers, but everyone shares one annual limit of $5,000 total. That's not $5,000 apiece. That's $5,000 for the whole cast.
And contributions stop earlier than you'd guess. The window closes on December 31 of the year the child turns 17, not 18. A grandchild born this October has a final contribution year of 2043.
Nothing comes out before 18. Not for camp, not for braces, not for a car. On January 1 of the year the child turns 18, the account becomes a regular traditional IRA and the young adult owns it outright.
The investments are limited by law to funds that track a broad index of American companies, with no leverage and fees capped at a tenth of a percent. Congress wrote that restriction into the statute itself. It disallows individual stocks and bond funds, which rules out most target date funds. At launch, everything goes into a single S&P 500 index fund, with more index options expected to come later.
But that's not what you saw in the headlines. Children born between January 1, 2025 and December 31, 2028 who are U.S. citizens can receive a one-time $1,000 deposit from the Treasury. Free money. It doesn't count against the $5,000. There's also a separate $250 deposit funded by the Dell family for children ten and under in ZIP codes where the median household income is $150,000 or less, aimed at kids born before 2025 who miss the federal money.
That $1,000 is actual, real free money. If you have a grandchild born in 2025 or later, somebody in that family should claim it. And as it turns out, it needs to be a very specific somebody.
The Part Where You Probably Can't Sign the Form
Eyes on me right now class, I need you to pay attention to this. You, as a grandparent, can put money into one of these accounts. You very likely cannot open one.
The first caution sign. The rules set a hierarchy for who's allowed to make the election that creates the account. For a grandchild born since January 1, 2025, a grandparent can only make the election if that grandchild is the grandparent's own dependent. For a grandchild born before 2025, there's a line, and grandparents are last in it, behind a legal guardian, behind a parent, and behind an adult sibling. A grandparent can only step in if nobody ahead of them is "available."
The problem is that they haven't defined "available." Physically unavailable? Emotionally unavailable? Because therapy ain't cheap.
And the form asks you to certify, under penalty of perjury, that you're authorized and that nobody with higher priority is available. The certification language on the form itself is generic enough that a well-meaning grandparent could sign it without ever realizing what they just swore to.
So my suggestion is for any grandparents who want to open the accounts, just wait until there's clearer guidance. This thing will be around for a long time, and a few more months of time may bring us some much needed clarity.
So the practical division of labor looks like this. The parents open the account and claim the $1,000. You fund it, if funding it makes sense. That's a fine arrangement, and it's also a phone call you should make before anyone fills out a form, because only one of these accounts can exist per child and duplicate elections get rejected.
While you have them on the phone, ask one more question. Both parents can now have employer money going into the same child's account, $2,500 from each of their jobs, and Treasury has confirmed that arrangement is fine. Two working parents at two companies with programs is the entire $5,000 annual limit, right there, before you write any checks. This is the second caution sign.
And if you contribute on top of that, the Treasury has said it intends to write the rules so that the excess comes out of your money first. Not the employer's. No one's system is watching this for you either, because employers have no obligation to track the family's $5,000 limit. So if two employers' contributions are already reaching the $5,000, additional contributions by the family will need to come back out.
If your grandchild is in a situation where the parents genuinely aren't in the picture, that's a different conversation and a more careful one.
What It's Actually Worth
The government's own calculator is optimistic. It shows a $1,000 seed growing to roughly $243,000 by age 55, and a fully funded account reaching eight figures. Those numbers assume the American stock market delivers better than 10% a year, every year, for more than half a century, and that nobody ever touches the money.
Morningstar ran the same question with return variability and real-world withdrawal behavior built in. Their average outcome for a child who receives only the $1,000 and nothing else was about $39,000 at 55. Same account. Same law. A very different number, because the second one accounts for the fact that people spend money when they can reach it, and 18-year-olds can reach this money. What would you have done if thousands of dollars showed up at your doorstep when you turned 18?
So let me walk through what it looks like for someone in your seat.
Say Roger is 68 and retired. His granddaughter Nora was born in March 2025, which means she qualifies for the $1,000. Roger wants to help, and he can comfortably do $5,000 a year. Scoring points for grandfather of the year.
If Nora's account receives the $1,000 plus $5,000 every year until she's 18, and if we assume a hypothetical 7% annual return, the account would hold roughly $173,000 on her 18th birthday. Not too shabby for an 18 year old. Roger will have written checks totaling $90,000. That $90,000 is her basis, meaning it comes back out tax-free someday. The other $83,000 is growth, and every dollar of it will eventually be taxed as ordinary income.
This is an important detail that can turn around and bite you. Roger funded the account with money he already paid tax on. Nora will pay tax on the growth at ordinary income rates, not at the lower capital gains rates that would have applied if Roger had simply bought the same index fund in a regular account in her name.
Most tax-favored accounts tax you on the way in or on the way out. This one does both. Ouch.
If Nora leaves that $173,000 completely alone until she's 60, at the same hypothetical 7%, it becomes something close to $3 million. And at that point roughly 97% of it is taxable at whatever ordinary income rates exist in 2085. Roger would have built his granddaughter a small fortune and a large tax problem at the same time.
There's a fix, and I think it solves most of what I just described. The problem is that it's annoying. Once the account owner turns 18, Nora can convert it to a Roth IRA. The conversion doesn't trigger the 10% early withdrawal penalty. Her basis comes across tax-free, and only the growth is taxed. Do that across several years in her early twenties while she's in low brackets, pay the tax with money from outside the account, and the whole thing becomes tax-free for the rest of her life.
One California note, since Nora lives here too. California taxes a Roth conversion the same way the federal government does, so she'd owe state tax on the growth as well. Her brackets at twenty-two should be low enough to keep that manageable. But a cousin doing the identical conversion in Washington wouldn't owe a dollar at the state level, which is a fair summary of this entire letter.
This seems like the best path to me for now. But notice that it requires a 22-year-old to execute a multi-year tax strategy two decades from now. A note with this strategy definitely needs to go into the family time capsule. Or maybe say "Hey Siri, remind me in 2047 to tell Nora to do a Roth Conversion." The best idea? Tell me and I'll remind you or your children in 18 years. I plan on being around.
Your State Gets a Vote
Federal tax law and state tax law are separate systems. Every time the federal government invents a new account, each state decides whether to go along. I mean, why make it simple?
California has not conformed. California's tax code is tied to the federal code as it read on January 1, 2025, and Section 530A was signed into law that July. So for California purposes, the account isn't a retirement account at all. It's treated more like a plain custodial account, which means the earnings inside it are taxable to the child each year rather than deferred. That noise you hear is me grating my teeth.
But how bad is this in practice?
By law these accounts can only hold broad, low-cost American stock index funds. Treasury named five. Every dollar currently goes into a single S&P 500 fund, because the software that would let you pick a different one isn't finished yet. All five funds charge two or three hundredths of a percent. All five pay somewhere between 1.0% and 1.2% a year in dividends. And none of them passes through capital gains, which is a quirk and benefit of how exchange traded funds are built.
Run a fully funded account through that. $5,000 for 18 years, and the total California tax across that entire childhood lands somewhere between three and ten dollars, depending on which of the five funds you end up in. Fund it at any level below the full $5,000 and the number is basically zero. The account simply never generates enough dividend income to cross California's threshold for taxing a child's investment income, which sits at $2,700 for this year.
Three dollars over eighteen years. I have unclenched my jaw and you can too.
It's almost ironic as to why. The restriction people in the media have been complaining about, that you can't hold bonds or a target date fund or really anything you'd pick yourself, is the same restriction that makes the state tax problem basically go away. A high dividend fund inside that account could generate close to two thousand dollars of California tax over the same stretch. I believe this is an appropriate time to say that this is a feature, not a bug.
So the tax isn't the California problem. Two other things are, and both are significantly more impactful.
The first is employer money. If your son or daughter works somewhere that contributes to a grandchild's account, the federal government leaves that out of their income and California does not. California calls it wages. A $2,500 employer contribution costs a California parent in the 9.3% bracket about $232 a year in state tax. Payroll tax applies too, federally, because the exclusion covers income tax and stops there. All in, that $2,500 costs somewhere between $270 and $425 depending on where their wages land, which comes to somewhere between $4,800 and $7,600 across eighteen years. That's real money, and it lands on your children rather than your grandchildren.
The second is switching funds. When Treasury finishes building the ability to choose, some families will move out of the default fund. In California that's a sale, and a sale means a realized gain. A family that switches when the child is fourteen could be sitting on forty thousand dollars of gain and a four thousand dollar California tax bill. This needs to come with a caution sign.
Then there's the recordkeeping, which is just a different kind of tax. California does give credit for tax already paid inside the account. But the only way to claim that credit in 2044 is to have kept the records since 2026.
Washington is clean. No state income tax means nothing to conform to. Washington's capital gains excise tax specifically exempts assets held in retirement accounts and only reaches very large gains anyway. A Washington family gets the federal treatment and nothing else to think about.
Oregon appears to conform. Oregon automatically follows federal changes unless the legislature votes to decouple, and this year's conformity bill decoupled from several federal provisions without touching this one. So Oregon families should get federal-style deferral. I'd confirm with your CPA before relying on it.
Arizona conformed in June. Arizona was in the same boat as California a year ago, frozen at January 1, 2025. Then in June the governor signed a bill moving Arizona's conformity date forward to January 1, 2026, retroactively picking up last summer's federal changes. Arizona families now get deferral.
Which tells you the thing I actually want you to take away. This is not permanent. Arizona was non-conforming and now isn't. California may follow, or may not, and Sacramento is not in a hurry. If you're funding one of these accounts for a California grandchild, you're making a decision under rules that could move. So just another reason to take it easy and wait for a bit.
Everything Here Has a Shelf Life
The law creating these accounts is a little over a year old. The accounts themselves have only been able to take money since July. Nearly every rule I've just described to you is still figuring out what they want to be when they grow up.
The regulations governing the accounts are proposed, not final. The employer contribution rules came out on August 11 and are sitting in a public comment period, with a hearing scheduled for October. The ability to move an account to Fidelity or Schwab or Vanguard doesn't exist yet and probably won't until sometime next year. Neither does the ability to pick a fund other than the default. The Department of Education still hasn't said how these accounts get treated for financial aid. And nobody has defined what "available" means on the form a grandparent signs.
The California math I just walked you through rests on a reading of state law that I believe is right but that the Franchise Tax Board has not fully spelled out. If California ends up taxing the growth inside the account rather than the income it pays out, those numbers change completely, and not in a direction you'd enjoy.
I'm telling you this to shape what you do, not to hedge. Claim the free money, which is settled and safe and doesn't depend on a single one of the open questions. Move slower on everything else. A commitment measured in eighteen years deserves rules that have stopped changing.
We'll come back to this. Probably more than once.
What We'd Actually Do
Claim the $1,000. Every time, no analysis required. Take the $250 from the Dell fund if the ZIP code qualifies.
Take employer money too. That $2,500 costs a California parent somewhere between $270 and $425 once you count state tax and payroll tax. Somebody is handing your grandchild $2,500 and asking your child for about three hundred. I'd take that trade all day.
Two things to know about employer money before anyone gets their hopes up:
The $2,500 is per parent, not per child. If your daughter has three kids, she gets one $2,500 exclusion to split among them, not three. And if she works two jobs and both employers contribute, she still only gets one.
Self-employed folks are shut out. Partners in a partnership, sole proprietors, and anyone owning more than 2% of an S corporation cannot receive these contributions, even from their own company. They can set up a program and fund it for their staff, and get nothing for their own children. If your son runs his own practice and you were about to tell him to just have the business do it, that's the call that saves him an amended return. There is a version that works for them, though not through the front door. Employers can let employees route their own pay into a child's account before tax, through a cafeteria plan. That's a salary reduction rather than a gift from the company, and for a family that was going to fund the account anyway, doing it with pre-tax dollars is a real improvement. Worth asking their HR department about.
Past that, think about this the way you'd think about a course load. There's required coursework, and then there's extra credit.
Required Coursework
If the grandchild has real earned income from a real job, a custodial Roth IRA beats everything else on the list. Nothing else lets a child put earned money somewhere it will never be taxed again.
If you're funding education, a 529 comes next. Money goes in after tax and comes out entirely tax-free for qualified expenses, which is exactly what these new accounts fail to do.
But I owe you a California footnote on my own advice here, because I nearly skipped it myself. Everyone quotes the rule that up to $35,000 of unused 529 money can roll into the child's Roth IRA. That's true federally. California does not go along with it. A 529-to-Roth rollover is taxable in California and carries an additional 2.5% state tax on the earnings, which makes this about the least friendly state in the country for that particular move. Oregon and Arizona both conform. Washington has no income tax to worry about. So the escape hatch on a 529 works cleanly for some of you and not for others. The 529 still wins for money you're confident is going toward school. The case softens as your confidence does.
After those, a plain custodial account in the child's name has the same exclusion on the first slice of investment income, capital gains rates instead of ordinary income rates, and the money can be used at twenty-one for a down payment or a business instead of sitting untouched until fifty-nine and a half.
Extra Credit
A 530A account earns its place once the required coursework is done, and it does one thing nothing else does. It is the only way to put retirement money in a child's name before that child has ever earned a dollar. A custodial Roth needs a paycheck. A 529 is school money, and a custodial account isn't a retirement account at all. This is the only door.
So the family this actually fits looks specific. The grandchild has no earned income. Education is either handled or beside the point. Five thousand a year doesn't crowd out something better. And somebody in that family will actually sit down and run a Roth conversion when the child is twenty-two, which is the move that turns this from a tax problem into a tax-free retirement account.
One narrow provision is worth knowing about, because for the families it touches it changes the whole picture. In the year the grandchild turns 17, and only that year, the entire balance can be moved straight into an ABLE account. For a grandchild with a disability, that turns money otherwise locked behind a retirement penalty into money available for qualified disability expenses. It's a one year window and an easy one to miss. If this describes your family, call me well before that birthday.
There's a second reason some of you will like it, and it has nothing to do with taxes. This money is harder to spend. A custodial account hands a 21 year-old unchecked power in an account. This one locks the money until 18 and then puts a penalty in front of most withdrawals until 59 1/2, with narrow exceptions for school and a first home.
One rule if you do fund one. Leave it in the default fund. The Treasury approved five, and every one of them is a broad American stock index fund charging two or three hundredths of a percent and paying dividends within a whisker of each other. There is no investment reason to switch. And in California, switching is a sale, which means a tax bill that could run into the thousands for a decision that was meant to be tidying up. When the ability to choose turns on, and it will, the right move is to leave it alone.
The $1,000 is extra credit. Worth taking, always. But nobody ever graduated on extra credit alone.
DROP and Give Me Ten!
This is going to be hard but I want to tell you about the most upsetting letter I've ever received. It wasn't even addressed to me. It was addressed to my Dad. After he had passed away. To a house we never lived in together. From a furniture company. The combination of grief, disgust and anger that I felt that day overshadowed something that I didn't realize until later as to why that happened. His data had been sold.
I'm sorry, let me gather myself a little bit here so we can talk about how you can prevent this from happening to you. There is no perfect cure to this problem, but we can make strides in this direction. Whoever sold it probably had to register with the State of California. And since August 1st of this year, you can make them delete it.
The program is DROP. It stands for Delete Request and Opt-out Platform, which actually isn't a bad name. California passed the Delete Act in 2023. The platform opened to residents in January. On August 1 it finally became useful, and every registered data broker in the state now has to actually process what people submit.
There are more than 600 of them registered as of August 2026. Companies you've never heard of, that have never heard from you, that know your address and your birthday and roughly what your house is worth. I know, ick.
What do the buyers of this information want to do with it? Mostly just target you for advertising, which is annoying. But I'm not sure every buyer is a legitimate business, which is far more concerning. What stops a scammer from buying this information? Do you think all 600 of these data brokers go through a level of scrutiny that you and I would deem to be necessary? I have my doubts.
The good news is that it's very easy. Go to the site, prove you live in California, then type your name, your date of birth, and your ZIP code. That's pretty much it. You can add email addresses and phone numbers for better matching, and you probably should, since the more you give them the more they can find.
Ten minutes is all it takes and you only do it once. That last part is my favorite. This isn't a form you have to remember to refile every spring. Brokers have to check the platform at least every 45 days from here on out and delete anything new that matches you. Your request keeps working long after you've forgotten you made it.
Now let me tell you what it doesn't do, and this is where it's not a cure-all.
DROP reaches the middlemen. It does not reach the companies you chose. If you handed your email to a retailer, they keep it. Public records stay public, so your property records and your voter registration are still out there. And nothing here retrieves what's already been sold. This is a tourniquet, not a time machine.
Then there are the exemptions. Health records are exempt under HIPAA. Anything touching your credit file is exempt under the Fair Credit Reporting Act. And financial information falls under a law called Gramm-Leach-Bliley.
Gramm-Leach-Bliley governs how financial firms handle your information. It's also the reason you get that dull privacy notice from TerraFirma every year, the one that goes into the recycling with the credit card offers. I don't blame you. I'd throw it away too. But in case you want to take a look at our privacy notice again, you can find it here.
But that law is exactly why your DROP request will never touch us. Or Altruist. Or your bank, or your insurer, or the CPA holding your last seven returns. The financial industry is already regulated on this, so the Delete Act left us out.
Financial services has been carved out of a lot of privacy law. We didn't lobby for it, but the financial industry does benefit from it. So the truth is that the industry holding some of the most sensitive information about you sat out the country's first universal deletion program.
What I can tell you is what happens on our end. At TerraFirma Wealth Partners, we never sell your information and use it to be able to perform the functions as your wealth advisor and manager. Again, more details in the privacy policy link above.
I did this already and it was painless. Genuinely impressive, but I might be saying that only because I have such low expectations from a government curated experience. The website was easy to navigate and understand. It really only took a few minutes while I had Netflix on in the background. It only took half my brain.
One more thing worth doing. You can file a DROP request on behalf of another California resident. A parent in assisted living. An adult child who will absolutely never get around to it. If you've got a family member who's a prime target for the calls and the letters and has no patience for a state website, that's ten more minutes well spent.
About one in ten of you reads this from outside California, and the program is current and former residents-only. The family provision still applies if your parents are here.
So: DROP, and give me ten minutes. Pushups optional.
Other Considerations for the 530A
Contributions for 2026 must be in by December 31. There's no April grace period like there is with an IRA. And the full $5,000 is available for this year even though we're already past the halfway mark. It isn't prorated.
The $1,000 election has a long runway. You have until December 31 of the year a child turns 17 to make it. But every year you wait is a year that $1,000 isn't compounding.
Employer rules are proposed, but usable. Treasury issued proposed regulations on employer contributions on August 11. Public comments close September 25 and there's a hearing October 15. The rules could still change at the margins, but employers are allowed to rely on them now, which means a company that wants to offer this benefit doesn't have to wait. If your children's employers have been telling them the rules aren't ready, that's no longer true.
Financial aid treatment is unresolved. No guidance from the Department of Education yet.
Gift tax filings, mostly resolved. The IRS issued a safe harbor in June that keeps ordinary contributions from triggering a gift tax return, as long as your total gifts to that grandchild stay within the annual exclusion for the year. If you're doing larger gifting to the same grandchild, let's coordinate.
Also on the calendar: third-quarter estimated tax payments are due September 15. Medicare open enrollment runs October 15 through December 7. And if you're taking required minimum distributions, let's not leave those to the last week of December.