The Trump account, a new tax-deferred vehicle aimed at helping families save for children, has been introduced as part of the One, Big, Beautiful Bill Act. However, it may not be the best option for college savings due to its restrictive funding limitations and tax-inefficient withdrawal rules.

Understanding Trump Accounts

Trump accounts are subject to two distinct phases: the growth period and the IRA period. During the growth period, families and employers can contribute up to $5,000 annually, with inflation adjustments beginning in 2027. The federal government will also make a one-time $1,000 contribution for children born between 2025 and 2028.

In the IRA period, which begins when the child turns 18, Trump accounts become subject to traditional IRA rules. This means that beneficiaries can continue contributing up to earned-income and contribution limits, but withdrawals are taxed as ordinary income. Early distributions taken before age 59 1/2 are also subject to a 10% penalty.

Comparison to Other Savings Vehicles

When compared to other savings vehicles, such as 529 plans and UTMA accounts, Trump accounts may not be the most tax-efficient option for college savings. 529 plans, for example, offer tax-free withdrawals for qualified education expenses, while UTMA accounts are subject to capital gains taxes.

A real-world comparison illustrates the difference. Assuming a family contributes $5,000 annually to a 529 plan, a UTMA account, or a Trump account for 18 years, the 529 plan grows to approximately $213,000, with tax-free withdrawals for qualified education expenses. In contrast, a Trump account grows to $213,000, but only the after-tax value of approximately $174,500 is available for educational expenses.

Original reporting: El Paso News (HLL/CB) — read the source article.