TIMOTHY A. CLARY // AFP via Getty Images
Trump accounts: Why they’re not your typical college fund
The Trump account, a new tax-deferred vehicle aimed at helping families save for children, poses a fundamental question: How is this tool best used?
Last year’s tax legislation (known as the One, Big, Beautiful Bill Act) introduced a new vehicle to the tax-deferred savings landscape: the “Trump account.” Like 529 college savings plans and custodial accounts held under the Uniform Transfers to Minors Act (UTMA accounts), Trump accounts offer a way to earmark assets for children. But what problem are these accounts designed to solve?
Early commentary often treated Trump accounts as a potential education savings tool. Subsequent IRS guidance—most recently IRS Notice 2025‑68—confirms that Trump accounts generally operate as a specialized form of traditional IRA after the child reaches age 18, which can make them more comparable to long-term retirement-savings vehicles than to education-specific accounts. To decide which path to take, examining the tax attributes of each option is crucial. The following analysis from Bernstein Private Wealth Management aims to demystify these considerations and help families make the most prudent choices for their specific circumstances.
529 Plan Basics
Among the most popular savings vehicles for affluent families, 529 plans are known for their tax efficiency. But this comes with strict constraints on how their funds must be used to avoid triggering substantial income taxes and other penalties. The tax advantages of these vehicles begin at the funding stage, where donors may “superfund” a 529 plan—using a provision under Internal Revenue Code section 529(c)(2)(B)—by making up to five years’ worth of annual exclusion gifts in a single lump sum. This lets those assets compound on a tax-deferred basis earlier and for longer time periods. If distributions are channeled toward qualified academic expenses like higher education, limited K-12 tuition, apprenticeships, and certain student loan repayments, those withdrawals are income tax free. More recently, the SECURE 2.0 Act, part of the 2023 Consolidated Appropriations Act, expanded flexibility by permitting a lifetime transfer of up to $35,000 from a 529 plan to a beneficiary’s Roth IRA, tax and penalty free.
An Overview of UTMA Accounts
Parents willing to forego tax efficiency in exchange for flexibility would do well to consider funding UTMA accounts. This empowers donors to transfer assets to minors while retaining custodial oversight until their beneficiaries reach the age of majority, typically at age 18 or 21.
But bear in mind: UTMA accounts come with notable drawbacks. First, income and realized gains in a UTMA account are generally taxable to the child, and depending on the child’s age, student status, and amount of unearned income, the “kiddie tax” rules may cause part of that income to be taxed at the parents’ rates rather than exclusively at long-term capital gains rates. Second, once a beneficiary reaches the applicable age under state law, the beneficiary generally assumes full control of the account. That means families should think carefully about whether the loss of control aligns with their planning goals.
How Trump Accounts Work
While Trump accounts promote tax-deferred growth, they’re subject to restrictive funding limitations and tax-inefficient withdrawal rules. To truly understand their function, it’s essential to explore two distinct phases: the growth period and the IRA period.
Phase One: The Growth Period
The growth period runs from account creation through Dec. 31 of the year in which the child turns 17. During this period, families and employers may contribute up to $5,000 annually, with inflation adjustments beginning in 2027, under limits described in IRS Notice 2025‑68; employer contributions are capped at $2,500 per employee, and aggregate family and employer contributions cannot exceed the $5,000 annual ceiling. In addition, the federal government will make a one-time $1,000 contribution for children born between 2025 and 2028.
During the growth period, Trump accounts may only invest in specified low-cost mutual funds or exchange-traded funds (ETFs) that track broad U.S. equity indexes. That materially narrows the available investment menu relative to many taxable or custodial accounts. What’s more, distributions are prohibited during the growth period, meaning beneficiaries may not access the funds during this phase.
Phase Two: The IRA Period
Beginning Jan. 1 of the year a beneficiary turns 18, a Trump account generally becomes subject to the rules applicable to traditional IRAs, subject to certain special coordination and reporting rules. Namely, Trump accounts may not accept SEP or SIMPLE IRA contributions, and they must be tracked separately from other IRA assets. At that point, the special growth-period investment restrictions cease to apply. While beneficiaries may continue contributing up to earned‑income and contribution limits, withdrawals are taxed as ordinary income. And barring exceptions, early distributions taken before age 59 1/2 are subject to a 10% penalty.
Should Trump Accounts Be Used for Educational Expenses?
When first introduced, many families wondered whether Trump accounts could efficiently fund education expenses while avoiding an additional 10% penalty. But many failed to realize that these assets are still taxed at ordinary income rates upon withdrawal. The following real-world, apples‑to‑apples comparison illustrates why this distinction matters.
Assume a family contributes $5,000 annually (the maximum permitted contribution to a Trump account) to a 529 plan, a UTMA account, or a Trump account for 18 years. Under these assumptions, a 529 plan grows to approximately $213,000 (Display 1). Because qualified education withdrawals are tax free, the full balance is available for financing education. On the other hand, a UTMA account grows to roughly $199,000, but after capital gains taxes, only $187,500 is available for education. Meanwhile, a Trump account grows to $213,000, but only the after‑tax value of approximately $174,500 is available for educational expenses.
Bernstein Private Wealth Management
The takeaway is clear. When it comes to tax-efficient education funding, families should prioritize 529 plans, followed by UTMA accounts, and finally Trump accounts. Although the last option benefits from tax‑deferred growth, withdrawals are taxed at high ordinary income rates. UTMA accounts benefit from lower capital gains rates, while education-funding 529 plans eliminate income taxation altogether on qualified withdrawals, even though families should keep in mind that Trump accounts are generally expected to be excluded from reportable assets for financial aid, unlike 529 and UTMA balances.
For Retirement, Timing Is Everything
When all is said and done, Trump accounts are best evaluated as retirement‑savings tools rather than education vehicles. A 529 plan’s utility in this context is limited; SECURE 2.0 allows only a $35,000 lifetime rollover to a Roth IRA. Therefore, the relevant comparison is between Trump accounts and UTMA accounts.
Here, timing matters. In the early years, given the ongoing taxation of UTMA accounts and the tax-deferred nature of the Trump account, the Trump account appears superior. However, nonqualified distributions from a Trump account before age 59 1/2 will be assessed a 10% penalty on the earnings in addition to the ordinary income tax. It takes until the penalty expires after approximately 59 years for the after-tax value from a Trump account to be greater than the after-tax value of a UTMA account (Displays 2 and 3), based on the illustrative assumptions in Bernstein’s modeling of Trump‑to‑Roth conversion scenarios.
Bernstein Private Wealth Management
Bernstein Private Wealth Management
The lesson isn’t that Trump accounts are universally superior; it’s that their ideal application is situational. For those with long horizons and clear retirement objectives, Trump accounts can play a limited but meaningful role. However, for many families, relying on this vehicle to fund education or short-term needs is like trying to eat soup with a fork—technically possible, but inefficient and frustrating. In most cases, more familiar and purpose-built tools remain the better fit.
This story was produced by Bernstein Private Wealth Management and reviewed and distributed by Stacker.
