Trump Accounts: Why They’re Not Your Typical College Fund

529 Plan Basics

Among the most popular savings vehicles for affluent families, 529 plans are known for their tax efficiency. But this comes with strict constraints on how their funds must be used to avoid triggering substantial income taxes and other penalties. The tax advantages of these vehicles begin at the funding stage, where donors may “superfund” a 529 plan by making up to five years’ worth of annual exclusion gifts in a single lump sum.^[2] This lets those assets compound on a tax-deferred basis earlier and for longer time periods. If distributions are channeled toward qualified academic expenses like higher education, limited K-12 tuition, apprenticeships, and certain student loan repayments, those withdrawals are income-tax free. More recently, the SECURE 2.0 Act expanded flexibility by permitting a lifetime transfer of up to $35,000 from a 529 plan to a beneficiary’s Roth IRA, tax- and penalty-free.^[3]

An Overview of UTMA Accounts

Parents willing to forego tax efficiency in exchange for flexibility would do well to consider funding UTMA accounts. This empowers donors to transfer assets to minors while retaining custodial oversight until their beneficiaries reach the age of majority, typically at age 18 or 21.

But bear in mind: UTMA accounts come with notable drawbacks. First, income and realized gains in a UTMA account are generally taxable to the child, and depending on the child’s age, student status, and amount of unearned income, the “kiddie tax” rules may cause part of that income to be taxed at the parents’ rates rather than exclusively at long-term capital gains rates. Second, once a beneficiary reaches the applicable age under state law, the beneficiary generally assumes full control of the account. That means families should think carefully about whether the loss of control aligns with their planning goals.

How Trump Accounts Work

While Trump accounts promote tax-deferred growth, they’re subject to restrictive funding limitations and tax-inefficient withdrawal rules. To truly understand their function, it’s essential to explore two distinct phases: the growth period and the IRA period.

Phase One: The Growth Period

The growth period runs from account creation through December 31 of the year in which the child turns 17. During this period, families and employers may contribute up to $5,000 annually, with inflation adjustments beginning after in 2027.^[4] In addition, the federal government will make a one-time $1,000 contribution for children born between 2025 and 2028.

During the growth period, Trump accounts may only invest in specified low-cost mutual funds or exchange-traded funds (ETFs) that track broad U.S. equity indexes. That materially narrows the available investment menu relative to many taxable or custodial accounts. What’s more, distributions are prohibited during the growth period, meaning beneficiaries may not access the funds during this phase.

Phase Two: The IRA Period

Beginning January 1 of the year a beneficiary turns 18, a Trump account generally becomes subject to the rules applicable to traditional IRAs, subject to certain special coordination and reporting rules. Namely: Trump accounts may not accept SEP or SIMPLE IRA contributions, and they must be tracked separately from other IRA assets. At that point, the special growth-period investment restrictions cease to apply. While beneficiaries may continue contributing up to earned‑income and contribution limits, withdrawals are taxed as ordinary income. And, barring exceptions, early distributions taken before age 59½ trigger a 10% penalty.

Should Trump Accounts Be Used for Educational Expenses?

When first introduced, many families wondered whether Trump accounts could efficiently fund education expenses while avoiding an additional 10% penalty. But many failed to realize that these assets are still taxed at ordinary income rates upon withdrawal. The following real-world, apples‑to‑apples comparison illustrates why this distinction matters.

Assume a family contributes $5,000 annually (the maximum permitted contribution to a Trump account) to a 529 plan, an UTMA account, or a Trump account for 18 years. Under these assumptions, a 529 plan grows to approximately $213,000 (Display 1). Because qualified education withdrawals are tax‑free, the full balance is available for financing education. On the other hand, a UTMA account grows to roughly $199,000, but after capital gains taxes, only $187,500 is available for education. Meanwhile, a Trump account grows to $213,000, but only the after‑tax value of approximately $174,500 is available for educational expenses.

The takeaway is clear. When it comes to tax-efficient education funding, families should prioritize 529 plans, followed by UTMA accounts, and finally Trump accounts. Although the last option benefits from tax‑deferred growth, withdrawals are taxed at high ordinary income rates. UTMA accounts benefit from lower capital gains rates, while education-funding 529 plans eliminate income taxation altogether.^[5]

For Retirement, Timing Is Everything

When all is said and done, Trump accounts are best evaluated as retirement‑savings tools in most cases, as opposed to education vehicles. A 529 plan’s utility in this context is limited; SECURE 2.0 allows only a $35,000 lifetime rollover to a Roth IRA. Therefore, the relevant comparison is between Trump accounts and UTMA accounts.

Here, timing matters. In early years, due to the ongoing taxation of the UTMA accounts and the tax-deferred nature of the Trump account, the Trump account appears superior. However, nonqualified distributions from a Trump account before age 59 ½ will be assessed a 10% penalty on the earnings in addition to the ordinary income tax. It takes until the penalty expires after approximately 59 years for the after-tax value from a Trump account to be greater than the after-tax value of an UTMA account (Displays 2 and 3).^[6]

The lesson isn’t that Trump accounts are universally superior; it’s that their ideal application is situational. For those with long horizons and clear retirement objectives, Trump accounts can play a limited but meaningful role. However, for many families, relying on this vehicle to fund education or short-term needs is like trying to eat soup with a fork—technically possible, but inefficient and frustrating. In most cases, more familiar and purpose-built tools remain the better fit.