Trump Accounts vs. 529s, custodial accounts, Roth IRAs

Starting July 4, Trump Accounts will give parents a new option to save and invest for their children’s future. It joins other types of investment accounts you can open in the name of a minor.

Certified financial planner Ben Henry-Moreland of advisor platform Kitces.com said the Trump Account, also known as a 530A account, is “a tool in the savings toolbox with a specific purpose” rather than “the one kid account to rule them all.”

Families may also consider a 529 college savings plan, a custodial account for minors under the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act (also known as the Uniform Transfers to Minors Act). UGMA and UTMAand a Roth individual retirement account if a child is earning income.

Experts say each option has different advantages and disadvantages, depending on your long-term plan. Here’s a breakdown of the rules and restrictions for these accounts:

Employers can also contribute: $2,500 per employeeAccording to the IRS, this is part of the $5,000 annual limit and does not count as taxable income. Additionally, qualifying charities and state and local governments may make contributions that do not count against the $5,000 limit.

Roth IRAs:

The Roth IRA contribution limit is up to $7,500 for 2026, but children cannot contribute more than their earned income for the year.

529 plans:

529s have much higher annual contribution limits. Parents and other individuals can each gift up to $19,000 per child, or up to $38,000 if married and filing taxes jointly; these contributions do not count toward the lifetime gift tax exemption.

Families can also “superfund” a 529 account, which allows five years of tax-free gifts to be front-loaded into the 529 plan. In this case, one person can contribute. up to $95,000or $190,000 for a married couple. But in this case, you can’t give more money to the same recipient over a five-year period without it counting against your lifetime gift tax exemption.

Escrow accounts:

While there are no annual contribution limits on brokerage accounts for minors, gifts over $19,000 per year or $38,000 for married couples can also trigger federal gift tax reporting.

Trump Accounts:

Trump Accounts function mostly like individual retirement accounts, with some exceptions. Any growth will not be subject to annual tax on capital gains and dividends.

Depending on the different types of contributions, withdrawals may include a mix of taxable and non-taxable money. Withdrawn earnings are taxed as ordinary income, according to U.S. Treasury Department guidance.

In more than half of the US states, you can get: tax deduction or credit for your contributions. Earnings grow tax-advantaged, and when you withdraw the money, it becomes tax-free if the funds are used for a certain period of time. qualified education expenditure. Otherwise, your earnings may be subject to tax and a 10% penalty.

Escrow accounts:

Escrow accounts are taxable accounts, meaning they do not carry tax benefits like others, so investment income such as interest and dividends are taxed annually.

Tax rates on this income will vary depending on several factors. For example, short-term capital gains tax rates apply to profits from investments sold after one year or less of ownership. These profits are taxed as ordinary income. In contrast, long-term capital gains are generally taxed at a lower rate; these apply to investments sold after one year.

Parents should “keep”child tax” rules in mind. These rules apply to those under 18 or most full-time students under 24. Generally, the child’s unearned income (such as taxable interest, dividends, and capital gains) over $2,700 is taxed at the parent’s marginal income tax rate.

Trump Accounts:

Trump Accounts will be invested in “broad U.S. stock index funds,” such as mutual or mutual funds. exchange-traded funds. So the money in the Trump Account is limited to stocks only, rather than a mix that includes bonds or other assets. However, the exact investment options have not been announced yet.

It is not possible to withdraw money from the Trump Account before the age of 18. limited exceptionsAccording to the IRS.

At age 18, the standard rules for traditional IRAs apply. Withdrawals before age 59½ are generally subject to income taxes and a 10% penalty. Yes some penalty exceptionssuch as distributing higher education expenses or purchasing a first home.

“It’s really important for parents and their kids to have a plan,” Henry-Moreland said. “Especially once they turn 18, most kids will have the ability to do whatever they want with their Trump Account, including completely liquidating the Trump Account.”

Roth IRAs:

With a Roth IRA, contributions can be withdrawn at any time without taxes or penalties. Generally, earnings can be withdrawn without tax or penalty after age 59½, with some exceptions to the 10% penalty on withdrawals of earnings before that age.

The parent manages the account and investments until the child reaches the age of majority (usually 18, but may be 21 in some states).

529 plans:

Even before a child turns 18, funds from a 529 plan can be used to cover qualified education expenses such as vocational programs and apprenticeships, tuition for your child’s K-12 private school, and expenses related to K-12 education, such as tutoring, standardized test preparation, and educational therapy.

Funds not used for education expenses may remain with the account owner, be rolled over to another beneficiary, or rolled into a Roth IRA free of income taxes or tax penalties for the beneficiary.

Escrow accounts:

Similarly, in a custody account, control passes to the beneficiary when the child turns 18, depending on the state.

“There’s no one account that will solve everyone’s needs; it’s kind of mix-and-match,” said Alex Michalka, vice president of investment research at robo-advisor Wealthfront.

Your goals will be a big part of determining this mix.

“The Trump account is more like a shotgun blast, while 529s and Roth IRAs in particular are more focused on specific savings goals,” said Cary Sinnett, senior director of personal financial planning for the International Society of Certified Public Accountants.

Trump Accounts:

Financial experts say Trump Accounts are best for long-term savings because they mostly work like an account. IRA. With seed money and the ability to start at a younger age, funds have more time to grow, leveraging the power of compounding.

But these estimates are based on the S&P 500’s historical annual average return of more than 10%, and some advisors say they are overly bullish. The forecasts are based on “overly optimistic assumptions” about future stock market returns, without adjusting for inflation or taxes, Alan Viard, senior fellow emeritus at the American Enterprise Institute, a conservative think tank, wrote in an op-ed. January 23 report.

Trump Accounts can “shine” over other financial accounts if the child converts it to a Roth IRA early (perhaps in the mid-20s, to avoid child tax rules) and holds it until later in life, Levine said.

Roth IRA:

With a Roth IRA, account holders also have the advantage of being able to withdraw their contributions at any time without taxes or penalties, in case they need the money for, say, a down payment on a house or another large expense down the road.

In this sense, financial advisors say that such an account can also serve as a semi-emergency fund.

529 plans:

When broken down by various long-term goals, “the 529 is a clear winner when it comes to paying for college,” Michalka said. He said that high premium limits and tax advantages starting from birth make this savings tool different.

Escrow accounts:

After all, if a child plans to use the money in the account before age 59½ — a time when a 10% income tax penalty would typically apply on a Trump Account or Roth IRA — UTMA “will almost certainly be a much better option” in terms of creating after-tax wealth, Levine said.

This is because custody accounts have the advantage of flexibility.

“You can deposit whenever you want and withdraw whenever you want,” Michalka said. This also means you can spend the money on other major expenses that benefit the child before age 18, such as a first car or summer camp, he said. Note that child tax rules may apply.

“Keep in mind what your goals are and what the timeline for those goals is,” Michalka said.

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