Savings for Kids: Trump Accounts vs. 529 Plans

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“The spirit of the 529 plan is towards education and education savings. And the spirit of the Trump account is towards retirement savings, a lifetime nest egg.”

— Hannah Cole

In this episode of the Sunlight Tax Podcast, I explain the key differences between Trump Accounts and 529 Plans, two tax-advantaged savings options designed to help families invest in their children's futures.

You'll learn who qualifies for a Trump Account, how these new custodial investment accounts work, contribution limits, tax considerations, and how they compare to traditional 529 college savings plans. I also break down the advantages and drawbacks of each option, including flexibility, eligible uses, long-term growth potential, and strategies for maximizing tax-efficient wealth building.

Also mentioned in today’s episode:

00:00 Introduction to Trump Accounts and 529 Plans

02:00 What Are Trump Accounts? Eligibility and Benefits

04:50 Pros and Cons of Trump Accounts

09:07 Understanding 529 Plans and Their Benefits

13:01 Transferability and Investment Options in 529 Plans

17:58 Using 529 Funds for Education and Beyond

20:04 Comparing Purpose and Benefits of Both Vehicles

21:03 Final Tips and Strategic Considerations

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Episode Links:

The Sunlight Tax Podcast EP159: My #1 Tip to Make Your Kid a Millionaire

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Transcript:

Hannah Cole (00:07)

Hello, beautiful. Happy summer. I wanted to do a follow-up episode this week. following up on last week's episode about Trump accounts, which are a savings vehicle for your kid. I wanted to do a follow-up because I did get some questions about that episode asking me what the difference was between a Trump account and a five twenty-nine plan.

and I think that's a really good question. And there are reasons to use one versus the other, and some places where you might want to use both. So I thought today I would do a little pro and con of Trump accounts versus 529 plans and try to just lay out and make clear for you where one might make more sense than another. The other thing to be clear on is you can absolutely have both. You don't have to choose between them.

the only choice really is if you have a budget limit, you only have limited dollars to allocate, then of course you want to pick the one that works best for you and for your particular needs. So that is the purpose of today's episode that I hope to help you with. Deciding with your limited dollars which one makes more sense for you. But also be aware that even if you do have limited dollars, and especially if you don't, you can use both.

You can use both vehicles. Both things do something good for your kid. Okay. a little note on the name. whatever side of the aisle you are on, I know the name of the Trump account can feel really inflaming. I know this because as I predicted, I got some emails that were so angry just about the name that they missed the point of what the account does and the fact that it is know, a helpful.

savings vehicle for your kid. I do want to credit the idea and try to get away from the inflammatory name because in fact these accounts are vehicles that have been thought through by thoughtful, bipartisan, poverty-hating economists who really wanted to do good for inequities in the US population. Okay, so there is a really good spirit behind this.

and I don't want you to lose sight of that because there's this big label on the account that you don't like. I don't like it myself. Maybe you love it, I don't know. But I just wanna I want us to try to move away from the name and be able to see the facts of the situation, right? Not just get our brains kind of fried because of something we really dislike. Okay. So with that said, let's talk about.

the difference between Trump accounts and 529 plans. That's gonna be my primary focus, but I do also want to point out to you that in the case where you have a kid a minor who earns their own income, then you are allowed to open a Roth IRA on behalf of that kiddo and put into that account up to the Roth limit for the year, the amount

That that no more than the amount that the kid earned or the limit for a Roth IRA for that year, whichever lesser. but it's also a Roth IRA for a kid who earns their own income is a really particularly amazing tax strategy that you can use. It is something I have opened for both of my daughters. When my daughter started babysitting, I was like,

Cha-ching, it's Roth IRA time. And then my other daughter started a little jewelry business and has been doing craft markets and cha-ching. We opened a Roth IRA for her as well. I have an episode about that. I will link to it in the show notes. that's a whole different strategy, but a wonderful one. So want to call your attention to the fact that I'm not really gonna address that today, but

The requirement if you open a Roth IRA for a kid is that they have to actually on their own be earning income. So this typically is not a thing you can do for a baby, right? Unless your baby's modeling, maybe they are. there could be, you know, a baby, a child actor, maybe your baby plays a baby in a movie, gets paid. That baby can have a Roth IRA. But for most of us, we don't have kids earning money until the kid is, you know, capable of doing work. okay.

So I'll link to that Roth IRA for your kid episode in the show notes. It's an awesome strategy. I definitely want you to be aware that it exists. It kind of saves you tax. It's a tax shelter that shelters taxes on the front end and the back end when you put the money in and when you take it out in a kind of amazing way, just because of the nature of kids not earning much income. So check that out. But for now, let's talk Trump accounts versus

529s. Okay. Alright, so just a quick review. And if you want the full review, please see last week's episode on Trump Accounts. But Trump Accounts are a new kind of account. They just became available to actually use in July 2026. So just this month, as I'm recording, they became available to open. So they are now accessible to you. So that's why I put out an episode this month about them. The nature of a Trump account,

It's kind of like an IRA for your kid. The purpose really is for retirement savings to build a nest egg for a child. It's a long-term wealth builder, okay? they're fairly restricted. we'll get into that a little bit, but they're for minors. Anyone under 18 is allowed to have a Trump account opened on their behalf. You as a family member can open one for your kid. You can actually open a Trump account for anyone.

So you could also open one for a friend's kid, right? Maybe you have some financial sophistication and savvy. You listen to the Sunlight Tags podcast, and you have a friend who is, I don't know, a single mom and you know that she could really use a little boost, you could, of course, with her permission, you could open this for her kid. very especially if she is eligible for the seed money that is available to kids.

born in the years twenty twenty five through twenty twenty eight. So if it's a baby. Okay. So Trump accounts are for building long term. Well, functionally they're very much like a traditional IRA, but they're something that you open for a minor. So it's a custodial account. And they build money, they build money through low-cost index investments in the long term.

These are only available to people who have a social security number. Yeah. Okay, so that's the basics. Here are the pros of Trump accounts. There is a bonus chunk of money that kids born between 2025 and 2028 are allowed to have. So if the kid in question was born between January 1st, 2028.

Five and December 31st, 2028. Yes, that's in the future. So maybe if you're pregnant or thinking about having a baby, I hope your ears are perking up because this may apply to you. the US Treasury, if you elect it on your tax return, the US Treasury will put a seed grant of a thousand dollars into that Trump account to get it started for you. So there is free money on the table for kids born between 2025 and 2028.

And you just have to check a box as you elect to open the Trump account on your tax return in order to get that seed money. That's a reason across the board. any kid born in 2025, 26, 27, or 28, get the money, get the free money, right? That that is a wonderful thing. I would definitely recommend you not miss out on that. Now, for kids who are older than that but under 18.

They're still allowed to have a Trump account, but they don't, they're not eligible for that $1,000 extra, which by the way is a not it's a non-taxable gift from the government. It's pretty nice. Okay, so you can still open account. So for these kids, older kids, it's a little less clear-cut if it's better to have a Trump account versus a $529. So pros getting that seed money, that is a big pro.

There is no earned income requirement for a Trump account. So I'm there's also not an earned income requirement for a 529 plan. So neither one has a requirement that the kid themselves earn income. But just to contrast this with the Roth IRA for a minor, if you open a Roth IRA for a minor, you can only do that. You can only put money into one if the kid themselves earns income. Okay. The Trump account does not have that. The kid does not need to earn any income.

in a Trump account as opposed to a 529 plan, an employer can contribute up to $2,500 per year into that kid's account, Trump account. So that is a benefit that the $529 does not provide. there is long-term compounding, right? It's

You know, a low cost, low fee index fund is pretty ideal. It is kind of just what you want to. This is not investment advice, but it's kind of what you want to be putting money in when you are investing for the long term. So for a kid to grow for their entire childhood. so it's restricted what you can put the money in. It has to just be low cost, low-fee index funds. but despite that being true, that's a pretty good vehicle.

Okay, so one con of the Trump accounts is that the withdrawals are taxable.

Right.

There's also a contribution cap. You can only put $5,000 into a Trump account each year. Now, this can be a combination of maybe $2,000 from you, $2,000 from grandma, $1,000 from your mother-in-law, right? That is possible. Multiple donors can add in to a Trump account, but the total donation to that account must not exceed $5,000. That is not including that employer contribution potentially. So if you had that.

you could get even more into that account. the investment options are limited, as I said before, so that's another con. And also if the kid, the beneficiary, withdraws the money before age 59 and a half, it's taxable with a 10% penalty. So very much exactly the same way as a traditional IRA would be.

You are going to pay tax when you withdraw the money after age 59 and a half. You'll pay ordinary income tax on that withdrawal. But if you withdraw the money before age 59 and a half, you'll pay ordinary income tax plus a 10% penalty. Okay. So, and then the last con of a Trump account is that it's non-transferable. So you open a Trump account for one specific individual and it can't go to their sibling.

Right? It can't go to the next generation. And this is a real negative contrast with the 529 plan, which can switch beneficiaries. This I have personally benefited from. I'll tell you in a second, but that could be a big deal. Okay, so let's talk about a 529 plan. First of all, what is it? Well, a 529 plan is an education savings plan. So

What's really important to understand is that the nature and intent of a 529 plan is to give you a tax advantaged account vehicle for growing money for the purpose of education. So the benefits really accrue to you when you use it for the purpose of education. There are some exceptions where you can touch the money otherwise, but the best benefit is when it's put to education. Okay? The Trump account spirit is towards retirement.

So that's actually a different goal altogether. It's more towards long-term growth. And it can be taken out penalty-free for education, a Trump account, but you will pay ordinary income tax on it. Whereas when you withdraw money from a 529 plan for a qualified educational purpose, you don't pay any tax. So you really do have a big savings. It is better. A 529 is definitively better in that sense for that purpose. All right.

The qualified withdrawals, tax-free education withdrawals from a 529 plan are college, K through 12, you know, private school.

tuition and also trade school. I want to highlight that because people I think tend to think of 529 plans as college savings plans. And especially in this day and age with AI really making people think twice about one, the value of college and two, their replaceability in a white collar world by AI. A lot of people are tending to go into the trades right now. So I do want to highlight for you that a 529 savings plan can pay for trade school that is qualified.

Okay. Now, and just a sort of strategy note, so I was mentioning that this transferability, a 529 plan can be transferred to another family member. it can even be transferred between generations. And this is really important, partly because you're saving for college or trade school.

At a moment where you don't know exactly where that kid may or may go to school, and it they might not even go to college at all, right? You don't totally know the future, and you don't know if they'll get a full scholarship, you don't know if they'll pick a more expensive or less expensive school. So you're saving with some invisibility about what amount you're actually gonna use. And so the fact that you could take excess and transfer it to another child who may go to an expensive college, right?

That is really valuable. I will also give you an example from my own life of how that transferability has was worked out really well for me. My partner and I have been saving in 529 plan since my first daughter was born. But I felt the need to go back to school and get retraining you know, to study accounting at a certain point when my daughter was pretty young.

And we had this 529 plan started, and I was allowed to take money from the 529 plan, tax-free, to pay for going back to school. And I cannot tell you how important that was in my life. That is part of the reason that sunlight tax exists, because I was allowed to do that. it would have been a lot harder for me to come up with the funds to go back to school without that pile of money that I had.

squirreled away for this other purpose that I was allowed to use for education. Okay. So transferability in a 529, worth a lot. All right.

Your investment options in the 529 plan are much more flexible. This can be important if you want to do like a target date fund, something where the funds roll from one type of investment to another across your timeline. Those funds do tend to be more expensive. I tend to be kind of a DIY girl when it comes to investments. I do my own choosing because the fact that I put that onus on myself actually saves me so much in fees, it's very worth it. But I understand a lot of people are as not.

Not as deep in the weeds or confident with investing as I am, and I'm I'm no expert, I just don't want to pay fees. and so it does a 529 plan you can definitely use more easily with a wider array of plans, which could be a good thing. The other thing that I really love about a 529 plan is that there is a Roth IRA conversion possibility.

So, like I was saying, the nature of a 529 plan is that you're saving money for a purpose that you know you don't know exactly how much money you will end up needing. And so you could have extra funds, right? We don't want to incentivize people not to save enough. and sometimes saving enough means saving more than you might actually need. So one of the beautiful things, this is a Biden era provision that was written into the code, is that a 529 up to $35,000.

Of unused 529 plan funds can be rolled over to a Roth IRA in that beneficiary's name. So to put some names to this, let's say my daughter, saved in a 529 plan for her college education. Let's say she gets a full scholarship to UNC Chapel Hill, right? And so we don't end up needing as much of that 529 as we thought we would if, say, she got into Duke, right? So

We would be able to take the excess money, take up to $35,000 of what's in that $529 plan and roll it into a Roth IRA for my daughter. Okay, so now that education savings for her can get converted into retirement savings. That's really nice. That's really nice. some cons on the 529 plan.

The uses are limited. It's really meant for education. Also, trade school. So that's a that's a form of education, but college, K through 12, and also trade school. If you use it for a purpose that is not a designated purpose, like a you know, a qualified education expense, you will pay a 10% penalty. Okay. So that's a good thing to know. And also, of course, there's no federal seed money. The federal government does not give you a bonus thousand dollars if your kid happened to be born in that little

four year window, twenty twenty-five, twenty twenty-six, twenty twenty-seven, twenty twenty eight, right?

So those are the major differences between the 529 plan and the Trump account. Remember, the spirit of the 529 plan is towards education and education savings. And the spirit of the Trump account is towards retirement savings, a lifetime nest egg. Okay.

So it is actually important to understand that the spirit altogether is different. and you can put money into both. All right. If your purpose is just

The education fund for your kids, a 529 plan is better. It's objectively better because there is no tax you will pay when you withdraw the money for that purpose, right? However, if your kid was born in that window with the federal seed money, it's worth it to take that money. And you certainly can add additional money up to $5,000 each year if you want to into the Trump account as well. The other thing is that a Trump account, I think it's nice that.

It can be opened by multiple parties. You don't have to be related to this kid to open a 529 plan for them. And anyone can put money in. So that's a nice quality as well. This means effectively you could gift a friend a 529 plan for their kid, right? What a generous thing to do. I think that's pretty awesome. So there are some benefits to that, but you know what? If you're feeling good about your plan using a 529 plan at this point.

It's totally fine to stick with it. All right. I hope that helps you. Please send me your questions. I'd love to know if anything feels unclear or if you have confusion about the law. Please don't yell at me because of the name. I didn't create it. I didn't vote for this guy. It's I really, really don't love when people shoot the messenger. So please remember that I do this for free to educate you. I am working for free. And if I get yelled at too much, I might just stop.

Cause I don't like it. Thanks for that. So, but if you have questions about the law itself, if you feel confused, if you're not sure, should I use this or this? I love that kind of question. I really welcome that. So please, please do let me know if you feel confusion or if you want me to do a follow-up future episode. And don't forget to check out that episode about the Roth IRA for a kid who earns income. Because man is that an amazing secret tax shelter. That is legal and wonderful.

To set up for your kit. All right. Next week we have some really great episodes coming up. I interviewed the writer Tessa Fontaine. she's a fiction writer. She spilled the tea about the writing life, about how fiction writers make a living, what the huge variation is between them. And we really talked a lot about capitalism and the spirit of art.

versus its relationship to money. And I think it's a really awesome episode. I hope you'll enjoy it. Stay tuned for it. All right. I will see you next week, everybody. Bye.