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The New Kids on the Block: Understanding Trump Accounts
- 7 days ago
- 5 min read
By Abram McCarty, Financial Advisor (LinkedIn)
Summer is Expensive & Your (Grand)kids Haven't Even Gone Back to School Yet
If your house is anything like ours, July disappears quickly.
One minute you're watching fireworks and convincing yourself vacation calories don't count because it's a holiday.
The next minute your clients are signing kids up for fall sports, buying school supplies, replacing shoes they somehow outgrew in six weeks, planning college move-in weekends, figuring out who's watching the grandkids while mom and dad are working, and wondering how "summer break" became more exhausting than the school year.
Just when you thought your wallet might get a break...
Congress introduced another savings account families may want to understand.
One of our clients laughed recently and asked,
"I already have a 529 plan. My parents opened a custodial account for my kids. Now you're telling me there's another one?"
Fair question.
Most of us would rather spend five minutes planning our next vacation than reading IRS rules. We would too.
But if someone handed your family an opportunity that could include a one-time $1,000 federal contribution for certain eligible children, it might be worth understanding how it works.
The newly created Trump Account isn't designed to replace your 529 plan or your child's custodial account. It's simply another tool that may fit into a family's long-term financial strategy.
Like most investment planning decisions, the question isn't which account is best? It's which account may best support your family's goals?
Let's walk through the differences.
Meet the New Kid on the Block
The Trump Account is a newly created savings and investment account for children established through federal legislation. While additional implementation guidance from the U.S. Treasury is still expected, the legislation creates a framework that allows eligible children to begin long-term investing at an early age.
Eligible children born between January 1, 2025, and December 31, 2028, are expected to receive a one-time $1,000 government contribution once the account election is completed.
Parents, grandparents and other family members may then contribute up to $5,000 annually, which may allow more time for investments to grow over time.
Politics aside, most families can agree on one thing.
If there's an opportunity to help jump-start a child's future savings, we believe it's worth understanding.
Think of These Like Tools in a Toolbox
Every financial account has a different purpose.
You wouldn't use a hammer for every project around your house, and you probably shouldn't rely on one investment account for every financial goal.
Each serves a different purpose.
529 Plans
For many families the 529 plan continues to be a commonly used investment for college savings. Contributions are made with after-tax dollars. Earnings grow tax deferred, and qualified withdrawals for education expenses are tax free. Recent legislation has added even more flexibility, including limited opportunities to transfer unused assets into retirement accounts under certain circumstances.
If your primary goal is helping pay for college or other qualified education expenses, we believe the 529 Plan often remains one of the most efficient options available.
UTMA / UGMA Accounts
We believe custodial accounts offer the greatest flexibility. Parents or grandparents can invest for virtually any future purpose rather than limiting funds to education.
The tradeoff comes later.
Once the child reaches a specific age under state law, control of the assets generally transfers to the child to spend however (s)he chooses.
Whether that's graduate school...or a sports car...it is ultimately no longer your decision.
Investment earnings may also be subject to the Kiddie Tax depending on income levels.
Trump Accounts
The newest option is designed with one goal in mind:
Start investing as early as possible.
Certain eligible children may receive an initial government contribution, and families can continue adding annual contributions that may allow for decades of potential growth.
The account is owned by the child with an adult acting as custodian until adulthood. Once the beneficiary reaches adulthood, the account generally transitions under Traditional IRA rules.
Time is one of the most valuable assets an investor has.
Starting earlier gives the power of compounding time to work
Since 1900, the major U.S. stock market benchmarks have doubled 9 to 10 times in nominal terms (not adjusted for inflation). For context, the Dow Jones Industrial Average started in the 20th century around the $70 mark and has since climbed past the $52,000 level. When you invest for longer periods, you allow for more potential growth.
Comparing Your Options
Feature | Trump Account | 529 Plan | UTMA / UGMA |
Primary Goal | Long-term investing | Education | Flexible savings |
Initial Government Contribution | Eligible children receive $1,000 | None | None |
Annual Contributions | Up to $5,000 (annual contribution limit applies) | No IRS annual limit (subject to plan and tax rules) | No IRS annual limit (subject to current tax rules) |
Tax Treatment | Tax-advantaged growth | Growth is tax-deferred. Withdrawals are tax-free for qualified withdrawals | Taxable investment account |
Flexibility | Long-term savings | Education expenses | Any purpose |
Ownership | Child at adulthood | Owner retains control | Child at legal age who gains full control over assets held in name (differs by state) |
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Should You Choose One?
Probably not.
We believe one of the biggest misconceptions in investment planning is believing every goal deserves only one account.
Families often use multiple strategies.
A 529 Plan may help fund education.
A UTMA account may provide flexibility.
A Trump Account may complement both by providing another opportunity for long-term investing.
Rather than competing with one another, these accounts could potentially work together.
The Questions That Actually Matter
Whenever new legislation creates another financial account, people naturally ask whether they should open one immediately.
A better conversation starts with different questions.
What is this money ultimately for?
When will you need it?
How much flexibility do you want?
How important are taxes in the decision?
Could grandparents use this as part of their gifting strategy?
Does your family already have education savings covered?
Those answers usually matter far more than the account itself.
Planning Beyond the Headlines
The news will spend months debating the politics behind this legislation. Families should spend five minutes understanding whether it helps them. Investment planning isn't about choosing sides. It's about choosing strategies.
Backpacks wear out.
Soccer cleats get too small.
College tuition probably won't become less expensive.
But one thing hasn't changed. The earlier you begin investing and keep it invested, the more time compounding has to work (with of course, potential growth based on your investment portfolio).
Whether you're a new parent, helping a grandchild get started, or simply trying to understand another planning opportunity, remember this:
The account itself is rarely the strategy. The strategy is creating opportunities for the next generation. If you'd like to discuss how Trump Accounts, 529 Plans, or custodial accounts fit into your family's broader investment plan, we'd be happy to help evaluate the options and build a strategy around your goals.
Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Wells Fargo Advisors Financial Network does not provide legal or tax advice.
Source:
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