Trump Accounts

As a part of the One Big, Beautiful Bill, a new type of account, similar to a 529 plan, would be created. This account is what is known as a Trump Account, originally called a MAGA account or Money Accounts for Growth and Advancement. The intent of these accounts is to give children a financial head start, promote investment, and help pay for certain expenses such as education expenses. While the bill has yet to pass, with a Republican-controlled Congress, it does seems more likely that it will pass in some form. So, how do these accounts stack up against 529 plans?

How Would This Work?

Organized under proposed IRC code section 530A, parents of children under the age of 8 would be able to contribute up to $5,000 per year to an investment account for the child’s exclusive benefit. Newborns born in 2026 onward would be eligible to get $1,000 from the government to help jump start their Trump account.  Like a brokerage account, these Trump accounts would appreciate tax-free. The account will continue to grow until the child reaches the age of 18.  Once the child reaches 18, they can take out no more than half the value of the account between the ages of 18-25. Once the beneficiary reaches the age of 31, the account ceases to exist and all remaining value, subject to taxation, automatically goes to the beneficiary.

Distributions used for qualified expenses, such as certain education related expenses, are subject to long-term capital gains rates (20% max). If distributions are used for non-qualified expenses, they are treated as ordinary income and subject to ordinary income tax rates (per IRS tables).  Any distributions used for non-qualified expenses between the ages of 18 to 25 would be subject to an additional 10% penalty for premature withdrawal. 

529 Accounts vs. Trump Accounts

While both accounts can be used for qualified education expenses, 529 accounts will be preferred by most taxpayers. 529 accounts grow tax-free and are also distributed tax-free so long as monies are used for qualified education expenses. The downside of 529 accounts is that they are not earmarked for any other expense. Distributions taken from 529 accounts to pay for non-qualified expenses are subject to marginal tax rates. The Trump accounts, while they grow tax free, are subject to capital gains tax or ordinary income tax depending on the use of the funds. Contributions to 529 accounts are often deductible at the state level, up to a certain amount. There may not be guidance for some time on state level treatment for Trump accounts since the bill has not yet passed. Lastly, while 529 plans do not have capped contributions from a Federal perspective, some states do have imposed limits. Annual gift tax exclusion limits should also to be taken into consideration. Trump accounts, on the other hand, are capped at $5,000 per year.

WH Opinion

Trump accounts may be a good to implement in addition to a 529 plan, if able.  However, a Trump account likely will not be used over a 529 if it is considered purely for education purposes, as it is less flexible and is not tax-free to the beneficiary. In fact, adults in the 18 to 25 age range could get themselves in serious financial trouble if these Trump funds are used to pay for non-qualified expenses. Not only would those individuals be out the cash spent, but they would also have to pay tax on the distributions at their marginal rate plus a 10% penalty for taking the money out too soon. This is not something most adults in this age range readily understand. Trump accounts are a good attempt at giving young adults a starter fund, but for many, while the idea is great, the execution may miss the mark.

If you have more questions as it relates to Trump accounts, please feel free to contact us.

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