Understanding Trump Accounts: Tax treatment, planning strategies and how they compare (Part 2)

In Part 1, we outlined the basics of Trump Accounts, including eligibility, government seed funding and how families can begin the registration process. In Part 2, we turn to the questions that matter most for planning: how these accounts may be taxed, when funds can be used and how they compare to existing strategies such as 529 plans and custodial accounts.

Because the program is still being implemented, some of the finer details remain subject to additional guidance. However, enough structure exists to begin thinking about how these accounts may fit into a broader financial plan.

How Are Trump Accounts Taxed?

While final IRS guidance is still evolving, Trump Accounts are expected to function similarly to a tax deferred investment account.

In practical terms, this means:

- Contributions are made with after tax dollars

- Investments grow without annual taxation

- Taxes are generally deferred until funds are withdrawn

This structure is somewhat comparable to a traditional retirement account, in that the primary benefit comes from deferring taxes on investment growth over time.

However, unlike a traditional IRA, these accounts are not tied to earned income requirements, and contributions can be made by multiple parties, including family members and employers, subject to annual limits.

When Can the Money Be Used?

Trump Accounts are designed for long term use, with restrictions intended to discourage early withdrawals.

While detailed rules are still being finalized, the general framework allows funds to be used for:

- Education expenses

- Purchasing a home

- Starting a business

- Other major life milestones

Withdrawals for non qualified purposes may be subject to income tax and potential penalties, reinforcing the long term savings objective of the account.

How Do Trump Accounts Compare to 529 Plans?

A natural question for many families is whether Trump Accounts replace the need for a 529 plan. The answer is that they serve different purposes.

A 529 plan remains one of the most tax efficient ways to save specifically for education:

- Contributions grow tax free

- Withdrawals for qualified education expenses are tax free

Trump Accounts, on the other hand, offer:

- Greater flexibility in how funds can be used

- Broader applicability beyond education

The tradeoff is that Trump Accounts may not offer the same level of tax free treatment for education expenses. As a result, many families may find that the two strategies complement each other rather than compete.

How Do Trump Accounts Compare to Custodial Accounts (UTMA/UGMA)?

Custodial accounts, such as UTMA or UGMA accounts, are another common way to save for children. These accounts are simple to establish and offer broad flexibility, but they come with different tax characteristics.

Key differences include:

- Taxation: UTMA accounts are taxable each year, meaning interest, dividends, and gains may be subject to annual taxation, potentially at the parents' rate under kiddie tax rules. Trump Accounts are expected to allow tax deferred growth.

- Flexibility of Use: UTMA accounts can be used for any purpose that benefits the child, with no restrictions once the child reaches the age of majority. Trump Accounts are expected to have guidelines around qualified uses.

- Control: With a UTMA account, the child gains full control at the age of majority, which can create planning concerns. Trump Accounts may also transfer control at adulthood, but with more structured use guidelines.

In many cases, UTMA accounts offer maximum flexibility but less tax efficiency, while Trump Accounts aim to provide a balance between flexibility and tax advantages.

Strategic Opportunity: Roth Conversion Planning

One of the more compelling planning opportunities involves the potential to convert assets from a Trump Account to a Roth IRA once the child reaches adulthood.

If permitted under final guidance, this strategy could be particularly valuable during years when the child has relatively low income, such as:

- College years

- Early career stages

By converting funds in a low tax bracket environment, the individual may be able to:

- Pay taxes at a relatively low rate

- Move assets into a Roth structure

- Allow for future tax free growth and withdrawals

This approach could effectively transform early savings into long term, tax free retirement assets.

Important Consideration: The Kiddie Tax

While Roth conversion strategies may be attractive, families should also be mindful of the kiddie tax.

The kiddie tax applies to unearned income of children below certain age thresholds and can cause that income to be taxed at the parents' tax rate rather than the child's lower rate.

Depending on how Trump Account distributions are ultimately classified, this could:

- Reduce the effectiveness of certain strategies

- Require careful timing of withdrawals or conversions

In many cases, it may make sense to delay certain actions until the child is no longer subject to kiddie tax rules.

Contribution Considerations

As discussed in Part 1, Trump Accounts allow for annual contributions of up to 5,000 dollars per child. Contributions can come from multiple sources, including employers.

Because contributions are made with after tax dollars and the account grows tax deferred, the long term value is driven by:

- Consistency of contributions

- Investment selection

- Time in the market

Where Do These Fit in a Financial Plan?

Trump Accounts should be viewed as one piece of a broader planning strategy. They offer a unique combination of:

- Early funding potential

- Flexible use cases

- Long term compounding

For many families, the most effective approach may involve layering strategies:

- 529 plans for education specific goals

- Custodial accounts for flexible access

- Retirement accounts for long term savings

- Trump Accounts as a hybrid solution for future planning flexibility

Final Thoughts

Trump Accounts introduce a new way to think about saving for the next generation. While some implementation details are still being finalized, the core concept is clear: start early, invest consistently, and allow time to do the heavy lifting.

As with any new program, careful planning and ongoing monitoring will be important. As additional guidance is released, families should revisit their strategies to ensure they are making the most of the opportunities available.

In the end, the success of these accounts will not depend solely on the initial seed funding, but on how thoughtfully they are integrated into a long term financial plan.

Reid Schwartz is a columnist for The Item and Co-Founder of Creech Schwartz Wealth Management in Sumter, SC, where he works as a financial advisor helping individuals, families, businesses, and nonprofits plan for long-term financial success.

*Tax and accountancy services are not available through or provided by Creech Schwartz Wealth Management or &Partners, LLC.

This article is for educational purposes only and not to be interpreted as tax or legal advice. Any tax planning strategies discussed by Creech Schwartz Wealth Management will be in conjunction with your tax/legal professional.

Securities and investment advisory services offered through &Partners, LLC, a broker-dealer and investment adviser registered with the U.S. Securities and Exchange Commission and member FINRA, SIPC.