Trump Accounts have a ‘tax-advantaged’ alternative, CFP says — yet few families are capitalizing

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 firm.

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

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

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

Contributions to 529 plans generally are invested in mutual funds that contain a mix of stocks, bonds and cash-like investments. Often, that mix becomes more conservative as your child ages.

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

The money can now not only be used for two- or four-year college and graduate school but also for vocational and credentialing programs and apprenticeships.

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

Any leftover money from 529 plans can be used to pay back student loans, or up to $35,000 can be rolled over to Roth individual retirement accounts free of income tax or tax penalties.

For these reasons, “529s are a very powerful tool,” Esser said.

Even if your child doesn’t pursue any continuing education, you can also transfer the funds to another beneficiary or withdraw them and pay taxes and a penalty on the earnings. 

“Over the past few years, the expanded uses of 529 plans continue to transform the account beyond just ‘college-only,'” said Thomas Psaltis, head of education savings programs at Bank of America and Merrill.

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

Even more flexibility could be forthcoming: Earlier this year, Reps. Tom Barrett, R-Mich., Tracey Mann, R-Kan., Mark Alford, R-Mo., and Lou Correa, D-Calif., introduced the First-Time Homebuyer Empowerment Act, which would enable accountholders to put unused college savings toward a down payment on a home.

“Too many families can’t afford homes that work for them, plain and simple,” Barrett said in a statement. “An easy first step towards changing that reality is to let homebuyers tap into unused college savings in their 529 accounts and put them towards purchasing their first home.”

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

Despite the broad benefits, participation in 529 plans skews toward higher-income households, studies show.

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

To help maximize participation rates, tax-deferred Trump Accounts opened for babies born between 2025 and 2028 will receive a $1,000 initial deposit from the U.S. Department of the Treasury.

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

“Our view is that providing every eligible child with a meaningful starting asset is a transformative step, even recognizing families’ ability to contribute will differ,” Dell said in a recent interview with Time.

Other philanthropists in certain states have also committed to seed the accounts for qualifying families, and a number of employers have pledged to match the accounts’ $1,000 Treasury deposit.

However, with a Trump Account, all money is invested in U.S. stock funds only — no bonds to mitigate risk — and it’s not possible to withdraw Trump account funds before age 18 with very limited exceptions, according 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. There are certain penalty exceptions, such as for distributions for higher education expenses or the purchase of a first home.

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

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