Families have a new financial planning tool to consider. On October 1, the U.S. Treasury announced that automatic enrollment for Trump Accounts had been completed. More than 60 million eligible children now have accounts ready to be claimed by a parent or guardian.
That is generating an obvious question from parents: Should we be putting money into a Trump Account instead of a 529 plan?
For families saving for college, the answer is important. Trump Accounts can be valuable long-term investment vehicles for children, but they are not replacements for 529 college savings plans. The two accounts were designed to accomplish different things. And for many families, the best answer may eventually be: Use both, but for different purposes.
What Is a Trump Account?
A Trump Account is a new type of individual retirement account established for a child. Every eligible child under 18 with a valid Social Security number now has an account available to be claimed. Parents or guardians must claim the account before they can manage it or allow family members, friends and employers to contribute.
There is also a special federal benefit for younger children. Eligible U.S. citizen children born from 2025 through 2028 can receive a one-time $1,000 federal contribution after the appropriate election is made.
Families and others can generally contribute up to $5,000 annually, with that limit scheduled to adjust for inflation after 2027. Employers can contribute up to $2,500 annually toward an employee’s or dependent’s Trump Account, subject to the overall contribution rules.
During the child’s growth period, the money must generally be invested in low-cost funds that track broad U.S. stock indexes. Withdrawals are generally prohibited until the calendar year the child turns 18. That creates something incredibly valuable: Time. A child receiving money shortly after birth could potentially have nearly two decades of investment growth before adulthood.
A Trump Account Is Not a College Savings Account
Despite the obvious potential for the money to eventually help with education, Trump Accounts were not designed specifically as college savings vehicles. After the growth period ends, most of the special Trump Account rules disappear and the account generally operates under traditional IRA rules.
Qualified higher-education expenses can qualify for an exception to the traditional IRA 10% early-distribution penalty. But avoiding the penalty does not necessarily mean avoiding income tax. That is an important distinction.
A 529 works differently. When 529 money is withdrawn for qualified higher-education expenses, the earnings are generally federally income-tax free. That makes the 529 particularly powerful when the primary objective is: We are saving this money to pay for education.
Think of the Accounts as Different Buckets
Rather than asking “Trump Account or 529?” families may want to think about the purpose of each dollar.
529 Plan
Primary objective: Education. Potential advantages include tax-deferred investment growth, federally tax-free qualified education withdrawals, potential state tax benefits depending on where the family lives, flexibility to change beneficiaries under applicable rules, ability to use funds for a range of qualified education expenses, and limited ability to eventually roll qualifying unused funds into the beneficiary’s Roth IRA.
Trump Account
Primary objective: Long-term financial capital for the child. Potential advantages include a possible $1,000 federal seed contribution for eligible children born from 2025 through 2028, a long investment horizon, contributions from parents, grandparents, others and potentially employers, low-cost investment requirements during the growth period, and continued retirement-style investment potential after age 18.
What If My Child Doesn’t Go to College?
This is where Trump Accounts may be especially appealing to some families. Parents frequently hesitate to put too much money into a 529 because they worry: What if my child doesn’t go to college? What if they receive a large scholarship? What if we save too much?
529 plans have become significantly more flexible over time. Among other options, current federal rules allow qualifying unused 529 funds to be transferred to the beneficiary’s Roth IRA, subject to several restrictions including annual Roth contribution limits, a $35,000 lifetime limit, a 15-year account-age requirement and other rules.
But Trump Accounts provide a fundamentally different proposition. The account isn’t dependent on the child attending college. The money is already structured as a long-term financial asset belonging to the child. That means the family doesn’t have to predict at birth whether the child will eventually attend a four-year university, community college, graduate school, trade school, or pursue a completely different path.
That Fits a Career First Philosophy
At Pathfinders, we believe families should be careful about assuming that every child needs the same educational path. The question shouldn’t automatically be “How much do we need to save for four years of college?” It should eventually become “What education does this student actually need to reach the career they want?”
That’s why the arrival of Trump Accounts creates an interesting financial planning opportunity. Families can potentially separate education capital from long-term financial capital.
Consider a Family With a New Baby
Suppose grandparents want to give money to a newborn grandchild every year. Previously, the obvious education-focused answer might have been: Put it all into the 529. Now the family has another conversation to consider.
Perhaps some money goes into the 529 specifically for future education. Another portion could go into the child’s Trump Account and potentially remain invested much longer. And the child may already qualify for the government’s $1,000 seed contribution. Instead of one savings bucket, the family begins building two different pools of capital with two different purposes. That can create flexibility.
But Don’t Abandon the 529
The arrival of Trump Accounts does not make 529 plans obsolete. For families who expect to pay significant college expenses, the tax treatment of qualified 529 withdrawals remains extremely valuable. Consider a family that contributes money for 18 years and accumulates substantial investment earnings. If those earnings are eventually used for qualified education expenses through a 529, they can generally come out federally income-tax free. A Trump Account used for education does not automatically receive that same tax treatment.
Five Questions Financial Advisors Should Be Asking Families
When clients have young children or grandchildren, advisors now have another planning conversation to introduce.
- What is this money ultimately intended to accomplish? Is the primary objective education, long-term wealth creation, retirement, or flexibility? The answer may determine which account deserves priority.
- Is the child eligible for the $1,000 federal contribution? Families with eligible children born between 2025 and 2028 should understand the claiming requirements rather than assume the contribution happens automatically.
- Does the family’s state provide a 529 tax benefit? That can materially affect the comparison.
- Is an employer willing to contribute? Trump Accounts introduce an interesting new employee-benefit opportunity because employers may contribute toward accounts for employees or their dependents under the applicable rules.
- Are we saving for college, or are we building capital for the child? Those are not necessarily the same objective, and they may deserve different accounts.
The Bigger Question Isn’t Which Account Wins
Whenever a new financial product appears, the natural instinct is to ask: “Is this better than what we already have?” But that’s probably the wrong question here. A Trump Account doesn’t need to beat a 529. A 529 doesn’t need to beat a Trump Account. They serve different purposes.
For families expecting significant education expenses, a 529 can remain an extremely valuable tool. For families wanting to give a child a long-term investment account that isn’t dependent on attending college, a Trump Account introduces another option. For some families, the smartest strategy may be to use both.
Start With the Destination
This is where college planning and financial planning should intersect. Before deciding how much to save for education, families should eventually understand: What type of education might this student need? What might that education cost? Where might the student receive merit or institutional aid? Will graduate school be required? How much of the family’s education capital should be committed to undergraduate school? And how much financial flexibility should be preserved for the child’s future?
The account is simply the vehicle. The strategy should come first. At Pathfinders College & Career Advisors, that’s why we believe in: Career First. College Second. When families understand where a student is headed, they can make much smarter decisions about how much to save, where to invest it and ultimately how much education is worth paying for.
A Conversation for Financial Advisors
Trump Accounts will likely create questions from clients over the coming months. That’s an opportunity. Instead of simply explaining a new account, advisors can use the conversation to revisit the family’s entire education strategy, including 529 balances, projected college costs, graduate-school expectations and the family’s desired Return on Education.
Pathfinders helps families connect those financial decisions to the student’s career and college strategy. Connect with founder Aaron Greene and join the Career First. College Second. movement.
Navigating these decisions alongside a knowledgeable guide makes all the difference. Pathfinders works with financial planners to help their clients build smarter, tax-advantaged college savings strategies. Families can also join us at an upcoming college planning workshop to explore 529 plans, Trump Accounts, and scholarship opportunities in depth.
