Trump’s accounts have another ‘tax-advantaged’ approach, says CFP

Starting in July, Trump Accounts will give parents a new option to save and invest for their children’s future. But other tax-advantaged savings and investment vehicles already exist – and are often underutilized.

For example, only about 23% of parents currently use 529 college savings plans, according to a recent report by Edward Jones, a financial services company.

Saving for a child’s education is a financial priority, “yet it’s never been the No. 1 priority,” says Certified Financial Planner Andy Esser, an advisor at Edward Jones.

Still, for families evaluating their savings options before the July 4 launch of Trump Accounts, “529s are a good return — if not one of the better vehicles — because of the tax benefits,” Esser said.

Savings in a 529 plan grow tax-free, and withdrawals for qualified expenses are tax-free. Plus, you may get a federal tax deduction or credit for your donation.

Contributions to 529 plans are typically invested in mutual funds that contain a combination of stocks, bonds and cash-like investments. Usually, that mixture gets thicker as your baby grows.

Under the provisions of the “one big good bill,” which President Donald Trump signed into law last year, there are also eligible expenses for the use of funds from 529 plans.

The money will now be used not only for two or four years of college and graduate school but also for vocational and credentialing programs and vocational training.

Additionally, under the new tax law, you can pay up to $20,000 a year for your child’s K-12 private school tuition and expenses related to K-12 education such as tutoring, standardized test preparation and educational therapy.

Any remaining money from 529 plans can be used to pay off student loans, or up to $35,000 can be transferred to Roth retirement accounts without income tax or tax penalties.

For these reasons, “the 529 is a very powerful tool,” Esser said.

Even if your child is not pursuing any further education, you can also transfer the funds to another beneficiary or withdraw them and pay taxes and penalties on the gains.

“Over the past few years, the increased use of 529 plans continues to transform the ‘college-only’ account,” said Thomas Psaltis, head of education savings plans at Bank of America and Merrill.

“First, 529 plans are one of the best tax-free ways for families to help pay for future education costs and ease the burden on the next generation as tuition costs continue to rise,” he said.

Even more flexibility may be on the way: Earlier this year, Reps. Tom Barrett, R-Mich., Tracey Mann, R-Kan., Mark Alford, R-Mo., and Lou Correa, D-Calif., have introduced the Early Home Improvement Act, which would allow account holders to set aside unused college payments.

“Too many families cannot afford affordable housing, plain and simple,” Barrett said in a statement. “An easy first step in changing that reality is to allow homebuyers to use unused college savings in their 529 accounts and put them towards buying their first home.”

The bill is awaiting review by the House Ways and Means Committee.

Despite the broad benefits, participation in 529 plans is skewed toward higher-income households, the study shows.

Wealth disparity is one thing the new Trump Accounts, also known as 530A accounts, hope to address, the administration said.

To help increase participation rates, Trump tax-deferred accounts opened for children born between 2025 and 2028 will receive an initial deposit of $1,000 from the US Treasury Department.

Children 10 years of age or younger and born before Jan. 1, 2025 — who won’t qualify for the $1,000 donation — can get $250 in their accounts if they live in a ZIP code where the median income is $150,000 or less, with a $6.25 billion pledge from tech CEO Michael Dell and his wife, Susan.

“Our view is that providing every deserving child with a beneficial start-up is a game-changing step, even recognizing families’ ability to donate will vary,” said Dell in a recent interview with Time.

Some state charities have also committed to checking accounts for eligible families, and many employers have offered to match a $1,000 Treasury account deposit.

However, with the Trump Account, all money is invested in American stock funds only – there are no bonds to reduce the risk – and it is impossible to withdraw funds from the Trump account before the age of 18 without being severely restricted, according to the IRS.

At age 18, the general rules for traditional IRAs apply. Withdrawals before age 59½ are generally subject to income taxes and a 10% penalty. There are exceptions to certain penalties, such as the distribution of higher education expenses or the purchase of a first home.

While some financial advisers say Trump accounts may not offer the best tax incentives, many recommend families open an account and receive “free money” from the Treasury, employers or other sources, if they qualify.

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