Trump Accounts — Are They Actually Worth It Compared to the Alternatives?

Trump Accounts have gotten a lot of attention in the media, so I thought I’d post some quick high-level thoughts I have about where they fit into funding your kids’ (or grandkids) futures.

Why 529’s Should [Typically] Precede A Trump Account

If you do not plan to fund more than $100,000 for your child’s future support, I like the 529 as the first priority. Here’s why:

·       The cost of higher education has risen dramatically over the past several decades (average Public In-State college cost per year is now right around $30,000 per year, so $120,000 for a 4-year public in-state college education including room and board). Given that, if 529 funds are below $100,000, it’s very likely you won’t “overfund” the 529, especially because [if you have multiple kids] you can change the beneficiary on the 529 from 1 kid to another at any time.   

·       529’s are not limited to 4-year public universities – they have a very broad definition of higher-education such as trade/vocational school, certifications, etc. Even in an era of AI and robots, I can’t foresee where the majority of people don’t pursue at least SOME type of professional skills or certifications (which 529’s can be used for), not to mention on-campus housing  and [likely] the majority of off-campus housing [if enrolled at least half time, and enrolled in a degree or certification program or college/university].

·       529’s are tax-free when used for the above type of expenses (tuition, books, supplies, college housing, up to $10k of student loans, etc.). Trump accounts operate like a traditional IRA where the money grows tax-deferred, but it’s fully taxed as ordinary income to the child when it’s taken out.

·       Unused 529’s that have been open for at least 15 years are eligible for $35,000 of lifetime tax-free rollovers to a child’s Roth IRA. Though sadly it’s been 3.5 years since this law was implemented (Secure Act 2.0 in December 2022) and still crickets from the IRS about whether changing the 529 beneficiary resets the 15-year clock for purposes of the Roth-IRA-rollover eligibility.

·       Most states with state-income tax [like Colorado] offer a state income-tax deduction for contributions to 529’s. Not to mention Colorado has a 529 matching program up to $500 per year for 5 years for kids born after January 1, 2020. There are no tax benefits for contributions to Trump accounts.

·       While not official yet, I strongly believe that Trump accounts will be viewed as a “child’s asset” for purposes of financial aid. 529’s, for reference, are viewed as the “parent’s asset” – and child assets are viewed ~4x worse for purposes of need-based financial aid than parent assets. While this may be a non-issue for those who don’t qualify for need-based aid, it’s still something to be cognizant of.

Why UTMA’s Tend to be More Favorable Than Trump Accounts

If somebody is hesitant about 529’s, I tend to like UTMA’s more than Trump accounts if we’re again talking less than $100k being funded into any 1 account. Here’s why:

·       UTMA’s have better tax-benefits at under $100k of account-value than Trump Accounts

·       There’s unlimited contribution limits [whereas Trump accounts are capped at $5k per year contribution limits]. Not a big deal on the surface, but gets really sticky when grandparents want to get involved with helping.

·       UTMA’s have greater options when it comes to investing the money. Trump accounts will be limited to low-cost (0.10% or lower expense ratio) index mutual funds or ETF’s that “track broad U.S. equity indices” (such as the S&P 500). Not a huge deal, but I am an advocate for global diversification [which the UTMA allows for], whereas Trump accounts are only allowing investment into U.S. stocks.

When Trump Accounts Typically Make Sense

The only time I [currently] would suggest a Trump account is if a baby was born between 2025 and 2028 (so gets the free $1k contribution from the government), OR they have already done 529’s up to a reasonable level to pay for higher education AND funded UTMA’s beyond ~$100k and want to put away even more for their kids. Other than that, Trump accounts are complex from a tax-perspective due to tracking pre-tax funds (such as the $1k contribution from the government) vs after-tax basis (contributions up to $5k per year), non-uniform tax-treatment by different States, don’t offer tax-benefits up front (the contributions you make are non-deductible for tax purposes), and earnings/growth are fully taxable as income upon withdrawal/conversion.

All Account-Types to Help Fund Your Child’s Future

There are 5 types of accounts to help fund your kids’ futures, each with their own set of trade-offs that should be carefully considered in light of your goals for your children. Those 5 are: 529’s, UTMA’s, Trump Accounts, Irrevocable Trusts, and parent’s separate brokerage account. And I guess I’ll throw in a 6^th [Roth IRA] once your child begins earning their own income [as you can’t fund a Roth IRA without your own earned income unless you are married and your spouse has earned income].

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DISCLAIMER: These posts are intended to serve solely as general financial education and not personalized tax, legal, or investment advice. Before considering acting on anything you see in these posts, first consult with your tax, legal or investment advisor.

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