Trump Account or 529 Plan: Which Should You Fund First?

Parents of young children ask the same thing: if I can only save so much, where does the first dollar go? The short answer is to take the free money in the Trump account and use the 529 for the rest. The reason is how each account is taxed on the way out.

What does each account do differently?

Two rows matter most: the tax on growth and who controls the money. Qualified costs include college tuition, books and room and board. They also include some K-12 tuition and a limited amount of student loan payments, with dollar caps set by law.

A 529 owner can change the child named on the account to another family member without tax. A Trump account cannot be redirected. At 18 it belongs to the child, as we explain in the chapter on turning 18.

How much does the tax on the way out cost?

Take $10,000 and let it grow at a made-up 7% a year for 10 years. It becomes $19,671.51, which is $9,671.51 of growth. Now see what is left after tax in each account.

The 529 keeps $2,127.73 more than the Trump account. The plain account keeps $677.00 more. The tax rates are made up and the real ones depend on your situation. The Trump account loses here for one reason: its growth is taxed at ordinary rates, which are usually higher than gains rates. Our next chapter, on the tax catch, shows when that flips.

This example uses a child who is about 8 when the money goes in and 18 when it comes out, so the Trump account is open for withdrawals. It also leaves out state tax and special rules for children's investment income.

What about the $1,000 federal deposit?

Take it. A 529 never offers free money. The deposit is for eligible U.S. citizen children born from 2025 through 2028, and it does not count toward the $5,000 yearly limit.

Be careful about one thing. Some commentators say the deposit might come out tax-free. The IRS notice says the opposite. It says the federal deposit creates no basis, and the tax code leaves it out of the part of an account that is not taxed. At a made-up 22% rate, the tax on $1,000 is $220. Plan for it to be taxed, and treat anything else as a bonus.

What if the child does not go to college?

Each account handles this differently. Money in a 529 that is not spent on school has its growth taxed, and a 10% extra tax normally applies to that growth. The owner can instead name another family member as the new child on the account, with no tax.

A Trump account has no college test. After the growth years it follows traditional IRA rules, where a 10% extra tax can apply to money taken out early. The IRS notice lists exceptions, such as paying higher education costs, buying a first home, or being past age 59 and a half. So both accounts work best when you know what the money is for.

What order makes sense?

For most families, this order follows the tax rules:

1. Claim the $1,000 federal deposit, if your child is eligible. See how to claim it.
2. Take any employer money. Our chapter on employer contributions explains the limit.
3. Fund a 529 for college. Check your own state's plan, because many states give a tax break and rules differ.
4. Open a custodial Roth IRA once your child earns a paycheck. A Roth needs earned income, so a young child cannot use one. Our guide to Roth IRA accounts covers it.
5. Add your own money to the Trump account last, if at all.

This matches our wider article comparing the Trump account, 529 and custodial Roth, which uses a larger example and reaches the same order.

Limits of this chapter.

• The returns and tax rates are made up. Your rates depend on your income and your state.
• Rules for the Trump account's final regulations are still being written.
• This is general information, not tax or investment advice.