529 Plans Beat Trump Accounts for College Savings, But It Makes Sense to Have Both: Here's Why
The government will put $1,000 into a Trump Account for eligible newborns. Take it, but remember that college savings will be better off in a 529 plan.
Trump Accounts went live on July 4, and parents have been signing up ever since. The pitch is easy to like.
Any child under age 18 with a valid Social Security number can have a Trump Account established on their behalf. Eligible children born between January 1, 2025, and December 31, 2028, who are U.S. citizens can get a $1,000 contribution from the federal government.
With or without that contribution, you can add up to $5,000 a year to the account, and your employer can contribute as much as $2,500 of that total without it counting as taxable income to you.
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Free money for a newborn is a good deal, and you should claim your kid's $1,000 if they're eligible.
But I keep hearing the same question from parents: Should I put college savings here instead of a 529 plan?
The answer is no, and the reason has nothing to do with politics. It is in the tax code.
A retirement account under a different name
Strip away the branding and a Trump Account is a retirement account with a head start. Here is how it works. Until the year your child turns 18, the money is locked in what the law calls a growth period. It has to sit in a low-cost fund tracking a broad index of American stocks, with fees capped at 0.1% and no leverage allowed. Nobody can take money out during those years — not you and not your kid.
Then the account turns 18 and becomes a traditional IRA. That single fact drives everything else. Money in a traditional IRA grows tax-deferred, not tax-free, and when it eventually comes out, the earnings are taxed as ordinary income. Pull money before age 59½ and you generally owe a 10% penalty on the taxable portion unless an exception applies.
There is one more wrinkle that catches people. Only the money you and your family contribute creates "basis." The government's $1,000, anything your employer adds and any state or charitable contributions do not.
That means those dollars, plus every dollar of growth on top of them, come out fully taxable down the road.
Why a Trump Account is a poor substitute for a 529 plan
Put the two side by side and the gap is obvious. A 529 also grows without annual tax drag, but when you spend it on qualified education costs, the withdrawal is tax-free. Not deferred. Free. That is the whole point of the account, and it is exactly what a Trump Account does not offer.
Say you use a Trump Account to help pay for college. Because it is a traditional IRA by then, an exception can spare you the 10% penalty for qualified higher education expenses. Good.
But the earnings still land on the tax return as ordinary income, at whatever rate applies. The same dollars pulled from a 529 for the same tuition bill would have come out untaxed.
For a college goal, one account is built for the job and the other is being asked to moonlight.
The 529 also just got better, which sharpens the comparison. The annual K-12 withdrawal limit doubled to $20,000. Qualified expenses now include tutoring, SAT and AP fees, and educational therapies. And 529 money can now pay for workforce credentialing programs, not just traditional degrees.
If you want to see how the vehicles stack up against your actual goal, a college savings comparison guide like the one at the website I founded, CollegeLens, is a better starting point than a headline.
So where does a Trump Account fit?
It fits — just not where people are trying to put it. Think of the Trump Account as your child's first retirement account, funded by someone else. A thousand dollars invested in a broad stock index at birth, left completely alone for six decades, is a genuinely powerful thing.
That is not a small gift, and the lock-up that makes it useless for tuition is the same feature that makes it work as long-term compounding.
A few practical tips:
- Open the account and take the $1,000. It costs you nothing and there is no reason not to claim if your child is eligible.
- Ask HR about the employer contribution. Up to $2,500 a year, tax-free to you, is a benefit many workers do not know exists yet.
- Keep your college money in the 529. If a dollar is earmarked for tuition, it belongs in the account that lets you spend it tax-free.
- Do not skip the 529 to fund this. Contributing $5,000 a year here while your college plan sits empty is optimizing for the wrong decade.
The bigger picture
New accounts arrive with a lot of noise, and the noise tends to drown out the mechanics. The mechanics are what decide whether an account helps you. A Trump Account is a retirement vehicle wearing a family-finance label, and it is a decent one, especially if someone else is making the first deposit. It is simply not the thing that pays a tuition bill.
So take the free money. Open the account, let it sit and let it compound for 50 years. Then go back to funding the account that was actually designed for the goal you are worried about.
Two different jobs, two different tools, and the mistake would be asking one to do the other's work.
One caveat worth noting: The IRS has said more guidance and regulations are still coming, and state tax treatment does not always follow the federal rules.
If you are making a large contribution, it is worth checking where things stand before you commit.
Related Content
- How Trump Accounts Compare With 529 College Savings Plans
- Why the Trump Account Rollout Is Raising Questions About Social Security
- I'm a Financial Planner: Trump Accounts Are a No-Brainer if You're Eligible (How to Apply)
- The FAFSA Quietly Got Friendlier and Stricter This Year: Will Your Family Win or Lose?
- Parent PLUS Caps Just Changed the Math on Paying for College: How Will You Fill the Gap?
