Trump Accounts Draw $1.5B as Parents Weigh 529, Roth Trade-offs

More than 7 million Trump accounts have drawn $1.5 billion since opening July 4, but parents adding beyond the $1,000 government seed face a tax trade-off against 529 plans offering tax-free college withdrawals.

"Even if our contributions are small, the accounts can be converted to Roth IRAs later. And they're a great teaching tool to show the growth of money over time," said Craig Nofziger, a CPA near Indianapolis who is funding accounts for his son, born April 2025, and daughter, born June 2026.

Individuals can contribute up to $5,000 a year per child until the year the child turns 18, with funds locked until then and subject to traditional IRA rules afterward — withdrawals before 59½ typically incur tax and a 10 percent penalty. By contrast, 529 plans allow tax-free withdrawals for tuition, books and room and board, and up to $35,000 can roll into a Roth IRA. Nofziger funds 529s first, citing Indiana's tax credit up to $1,500.

The choice matters because families must allocate limited dollars among IRAs, 401(k)s, 529s, health savings accounts and the new Trump accounts. For wealthy savers seeking every tax-favored route, adding to a Trump account often makes sense; for those prioritizing college, 529s typically win on tax efficiency.

The $5,000 Cap and the Kiddie Tax Trap

Trump accounts, formally Section 530A accounts, accept contributions from parents, relatives, employers and certain nonprofits, with up to $2,500 of the $5,000 annual cap allowed from a parent's employer. No earned income is required, making them the only IRA-style vehicle available to babies and young children. Contributions are made with after-tax dollars, growth is tax-deferred, and withdrawals are taxed as ordinary income. Funds are invested in the State Street SPDR S&P 500 ETF, managed by Bank of New York Mellon and Robinhood Markets, with four additional low-fee index funds expected.

Contributions by governments, charities and employers are pretax, while individual contributions are often after-tax, complicating withdrawals because payouts must be prorated. Eric Bronnenkant, head of tax at Edelman Financial Engines, cites an example: a $160,000 account at age 18 with $90,000 from government, employers and earnings and $70,000 from parents and grandparents requires each withdrawal to include a tax-free piece of the $70,000. Custodians track this on IRS Form 5498-TA.

Some parents add to Trump accounts for teenagers to convert to Roth IRAs at 18. The conversion is partly or fully taxable, and amounts above $2,700 are taxed at the parents' rate under the kiddie tax. Gradual conversions or waiting until age 24 avoid the trap, Bronnenkant said.

529 Plans Still Win for College

Under current law, 529 plans are often better for families saving for college or vocational training. States often give deductions or credits — Indiana offers up to $1,500 — and withdrawals are tax-free for eligible expenses. Trump account withdrawals for college are often taxable, though without the 10 percent penalty. Financial aid treatment also differs: 529s are parent-owned assets counted at up to 5.64 percent on the FAFSA, while Trump accounts are expected to be student-owned assets assessed at up to 20 percent, though the Education Department has not issued official guidance.

For working teenagers, a custodial Roth IRA is generally the stronger vehicle: tax-free growth and qualified withdrawals, a 2026 limit of the lesser of $7,500 or earned income, and no FAFSA asset counting. For young children with no earned income, a Trump account is the only IRA-style option. Many advisors recommend layering: claim the $1,000 government seed, fund a 529 for education, and open a Roth IRA when the child starts working.

The right mix depends on the child's age and the family's goals. For newborns, J.P. Morgan's analysis concludes the answer is often both a Trump account and a 529. For teenagers with jobs, the Roth IRA delivers the greatest long-term tax benefit. Contribution limits and tax rules are subject to change as the program rolls out, so families should verify figures against the latest IRS guidance before deciding.

This article is for informational purposes only and does not constitute investment advice.