The Trump Account or the 529 Plan: Which One Is Best?

The new Trump Accounts, where eligible newborns receive a $1,000 government contribution, are now open for business. If we are talking specifically about college funding, which account is the better choice? The answer is the 529 plan.

The 529 plan remains the premier investment vehicle for saving for college tuition. So how does it compare to the new Trump Account?

First, we have to separate retirement planning from college planning. The Trump Account appears to assume that the child will leave the money invested for decades and use it as a retirement account in their 60s. There is one major problem with that assumption: the child takes full control of the account at age 18.

What is the likelihood that an 18-year-old will leave the money untouched for more than 40 or 50 years until retirement? I don’t know the exact probability, but I would consider it very unlikely.

So, instead of comparing retirement versus retirement, let’s compare the accounts for their most practical purpose: college funding.

For college planning, we continue to favor the most popular education savings vehicle in the country: the 529 plan.

Let’s Compare and Contrast

Benefit	Trump Account	529 Plan
$1,000 free contribution	Yes, if eligible	No
Ability to contribute each year	Yes	Yes
Maximum annual contribution limit	$5,000	Unlimited*
Tax-deferred growth	Yes	Yes
Distributions from the account	Yes	Yes
Tax treatment	Taxable when withdrawn at age 18	Tax-free if used for qualified education expenses
Ability to change investments	No	Yes, generally twice per year
Child gains full control at age 18	Yes	No

*Each state sets an aggregate lifetime contribution limit for 529 plans, typically ranging from approximately $235,000 to $600,000 or more per beneficiary.

The Choice: The 529 Plan

The biggest advantage of the 529 plan is the tax treatment. If the money is used for qualified college expenses, withdrawals are completely tax-free. If the money is not used for education, taxes and penalties may apply.

The Trump Account gives the child complete control of the money at age 18. The child can decide how the money is used, whether that means continuing to invest it or spending it. With a 529 plan, the account owner maintains control over the funds.

If there is money left over in a 529 plan, there are several options. The funds can be transferred to another family member’s 529 plan, or under certain rules and limitations, some unused funds may be eligible to be rolled into a Roth IRA for the beneficiary. The money can also be withdrawn for other purposes, but taxes and penalties may apply.

Final Thoughts

Yes, the Trump Account provides a $1,000 contribution for eligible babies born from January 1, 2025, through December 31, 2028. However, I do not believe the $1,000 government contribution provides enough of an advantage to outweigh the benefits and flexibility of a 529 plan.

When the goal is saving for college, the 529 plan remains the clear choice.

If you have further questions for Bob, please visit the Ask a Question page on www.prudentmoney.com. You can also call our office at 972-386-0384 or email info@prudentmoney.com.

 Bob Brooks

Bob Brooks is a Financial Advisor and host of the Prudent Money Radio Show, heard every weekday from 4:30 PM - 5:00 PM on FM Radio 91.3 KDKR.