13 Jul Trump Accounts vs. 529 Plans: Which Is Better for Grandparents Saving for College? | Nova Wealth Management
Trump Accounts vs. 529 Plans: What Grandparents Should Consider Before Saving for College
Grandparents often want to help grandchildren begin adulthood with fewer financial burdens. Paying for college, funding vocational training, or helping a young adult establish long-term savings can all be meaningful parts of a family’s legacy.
Trump Accounts have introduced a new way for families to save on behalf of children. However, a recent Barron’s article titled Grandparents, Don’t Use Trump Accounts for College Savings raises an important distinction: a Trump Account may support long-term wealth building, but a 529 College Savings Plan may still offer stronger advantages when education is the primary goal.
The appropriate account depends on what the family hopes the money will eventually accomplish. A strategy designed specifically for education may look very different from one intended to give a child flexibility for retirement, a first home, or a future business.
Quick Summary
Trump Accounts and 529 Plans can both help families save for younger generations, but they serve different purposes.
- Trump Accounts may provide broader long-term flexibility, but education withdrawals are not generally tax-free.
- 529 Plan earnings may be withdrawn tax-free when used for qualified education expenses.
- A grandparent or parent generally retains control of a 529 Plan after the beneficiary turns 18.
- A young adult generally gains control of a Trump Account when the account transitions after age 18.
- Families should begin with the goal for the money before selecting an account.
Why This Matters for Grandparents
Choosing an account is not simply an investment decision. It may affect taxes, control, financial aid, estate planning, and how the money can eventually be used.
Grandparents may be trying to accomplish several goals at once, including:
- Helping pay college tuition
- Funding vocational or trade-school education
- Creating an early retirement account
- Supporting a first home purchase
- Helping a grandchild start a business
- Transferring wealth to the next generation
These are all valid goals, but one account may not be ideal for every purpose. This is why education funding decisions may benefit from coordination with broader Financial Planning, Retirement Tax Planning, and Legacy & Estate Planning.
What Is a Trump Account?
A Trump Account is a tax-advantaged account created for children under age 18.
Under the rules described in the Barron’s article, family members, friends, and certain employers may contribute to the account, subject to an annual contribution limit. Children born during the applicable eligibility period may also qualify for a government-provided seed contribution.
Funds in the account are generally invested for long-term growth. When the beneficiary turns 18, the account transitions into an individual retirement account structure.
That transition may create future planning opportunities, but it also changes who controls the account and how withdrawals are taxed.
What Is a 529 College Savings Plan?
A 529 College Savings Plan is a tax-advantaged account designed primarily to help pay qualified education expenses.
Although contributions are not deductible for federal income tax purposes, account earnings may grow tax-deferred. Withdrawals may be federally tax-free when used for qualified expenses.
Depending on the state and the applicable plan, contributors may also qualify for a state income tax deduction or credit. State tax treatment varies, so families should review the rules that apply where they live and file taxes.
Why a 529 Plan May Be Better for College Savings
If a family’s primary goal is paying for education, a 529 Plan may offer several important advantages.
Tax-Free Qualified Education Withdrawals
Qualified withdrawals from a 529 Plan may be free from federal income tax. Depending on applicable state rules, favorable state tax treatment may also apply.
Eligible expenses can include certain costs associated with college, universities, vocational programs, and other qualified institutions.
By comparison, taking money from a Trump Account for education may create taxable income, even if an early-withdrawal penalty exception applies.
The Account Owner Retains Control
With a 529 Plan, the account owner generally retains control of the account even after the beneficiary becomes an adult.
This may be particularly important to grandparents who want to ensure the funds remain available for their intended purpose.
The account owner typically decides:
- When withdrawals are made
- How much is distributed
- Which qualified expenses are paid
- Whether the beneficiary should be changed
By contrast, a beneficiary may gain control of a Trump Account after turning 18. At that point, the grandparent or parent may no longer control how the money is managed or used.
Greater Flexibility Among Family Members
If the original beneficiary does not need the full 529 balance, the account owner may generally change the beneficiary to another qualifying family member without triggering federal income taxes.
This can be valuable when:
- A grandchild receives a scholarship
- The child chooses a less expensive school
- The beneficiary does not attend college
- Another relative has greater educational needs
This flexibility can make a 529 Plan useful for multigenerational education planning rather than for only one child.
Support for More Than Traditional College
529 Plans are no longer limited to four-year universities.
Depending on current federal and state rules, funds may potentially support:
- Vocational and trade-school programs
- Registered apprenticeship programs
- Certain K-12 tuition expenses
- Eligible student-loan repayments
- Books, supplies, and qualifying equipment
Families should confirm that an expense qualifies before taking a distribution.
The Control Question Should Not Be Overlooked
The account’s tax treatment is important, but so is control.
Grandparents may begin saving when a grandchild is very young. At that stage, no one knows what the child’s financial habits, maturity, health, or circumstances will be at age 18.
A young adult may responsibly preserve the money for education or retirement. However, the beneficiary could also choose to withdraw funds for a purpose the grandparent never intended.
This is not an argument against Trump Accounts. It is a reminder that account ownership and beneficiary control should be considered alongside potential returns and tax benefits.
Trump Accounts May Still Offer Valuable Benefits
Trump Accounts should not be viewed as inherently unsuitable. They may provide meaningful long-term savings opportunities when the goal extends beyond education.
Potential uses after the beneficiary reaches adulthood may include:
- Long-term retirement savings
- A first-time home purchase
- Starting or investing in a small business
- Higher education expenses
The account may be especially appealing when grandparents want to help a child establish an early retirement foundation and are comfortable with the beneficiary eventually controlling the funds.
Once the account converts to a traditional IRA structure, a future Roth conversion may also be considered. However, a Roth conversion generally creates taxable income and should be evaluated carefully.
Trump Accounts and Roth Conversion Planning
A younger beneficiary may eventually have the opportunity to convert all or part of the account into a Roth IRA.
Because many young adults have relatively low taxable income, a conversion could potentially occur at a lower tax rate. However, several factors may affect the outcome, including:
- The beneficiary’s income
- The size of the account
- The tax character of contributions and earnings
- Education-related tax benefits
- Financial-aid considerations
- Potential application of the Kiddie Tax
A Roth conversion should not be assumed to be automatically beneficial. It may be more appropriate to spread conversions across multiple tax years or wait until other tax considerations no longer apply.
What Happens If a 529 Plan Is Overfunded?
One concern families sometimes have is saving more for education than the beneficiary ultimately needs.
Current rules may provide several options, depending on eligibility and account history.
The account owner may be able to:
- Change the beneficiary to another qualifying family member
- Preserve the account for graduate school or future education
- Use eligible funds for vocational training
- Transfer a limited amount to the beneficiary’s Roth IRA when applicable requirements are met
- Take a nonqualified withdrawal and pay applicable taxes and penalties on earnings
The account owner generally does not lose ownership simply because the original beneficiary does not attend college.
Direct Tuition Payments May Be Another Option
Grandparents may also consider paying tuition directly to an educational institution.
Direct tuition payments may qualify for special federal gift-tax treatment and may not count against the annual gift-tax exclusion when applicable requirements are satisfied.
However, this exclusion generally applies only to tuition paid directly to the educational institution. It does not necessarily cover books, housing, transportation, supplies, or other expenses.
Families considering significant tuition payments should coordinate with qualified tax and legal professionals.
Nova Insight
The account should be selected based on the goal—not simply because it is new or receiving attention.
If the primary goal is qualified education funding, a 529 Plan may provide stronger tax benefits, greater control, and more beneficiary flexibility.
If the goal is broader—such as helping a child begin retirement savings, purchase a first home, or eventually start a business—a Trump Account may deserve consideration.
Some families may ultimately use both. A 529 Plan could support education goals, while a Trump Account or Brokerage Account could help create additional long-term flexibility.
The best strategy depends on the family’s cash flow, tax situation, estate plan, time horizon, and intentions for the money. New planning tools can be useful, but they are most effective when coordinated with the rest of the financial plan.
Trump Accounts and 529 Plans May Be Complements
Families do not necessarily have to choose only one account.
A coordinated strategy may assign a different purpose to each account:
- A 529 Plan for qualified education expenses
- A Trump Account for longer-term retirement or future flexibility
- A brokerage account for goals that do not fit either account
- A trust for greater control or complex family circumstances
Families may also coordinate these accounts with Revocable Living Trusts, Irrevocable Trusts, and broader legacy-planning strategies when appropriate.
Questions Grandparents Should Ask Before Contributing
Before opening or funding an account, consider asking:
- Is education the primary goal for this money?
- How important is retaining control after the child turns 18?
- Could another family member use the funds if the original beneficiary does not?
- What federal and state tax benefits may apply?
- Could the account affect financial-aid eligibility?
- How will the beneficiary be taxed when money is withdrawn?
- Does the gift fit within the grandparent’s retirement and estate plan?
- Would direct tuition payments or another strategy be more appropriate?
Frequently Asked Questions
Are Trump Accounts good for college savings?
Trump Accounts may be used for certain education expenses, but withdrawals may create taxes. When college is the primary goal, a 529 Plan may offer stronger education-specific tax benefits.
Do grandparents keep control of a 529 Plan?
The account owner generally retains control of a 529 Plan after the beneficiary turns 18, including control over distributions and beneficiary changes.
Who controls a Trump Account after the child turns 18?
The beneficiary generally gains control as the account transitions into an IRA structure, subject to applicable rules.
Can unused 529 money be transferred to another child?
The account owner may generally change the beneficiary to another qualifying family member without triggering federal income taxes.
Can a 529 Plan be rolled into a Roth IRA?
Current law may allow a limited rollover from a qualifying 529 Plan to the beneficiary’s Roth IRA when account-age, annual-limit, lifetime-limit, earned-income, and other requirements are satisfied.
Can grandparents pay college tuition directly?
Grandparents may pay tuition directly to a qualifying educational institution. Such payments may receive favorable federal gift-tax treatment when applicable requirements are met.
Related Reading
- 529 Plans and Estate Tax Planning Strategies
- Trump Accounts Are Not Just for Newborns
- How the Kiddie Tax Could Create an Unexpected Tax Bill for Your Child
- What Does a Trust Cost?
The Bottom Line
Trump Accounts may provide a new way for grandparents to help younger generations build long-term wealth. However, when the primary goal is education, a 529 Plan may provide stronger tax advantages, greater control, and more flexibility.
The decision should begin with the purpose of the money. Families should consider who will control the account, how withdrawals will be taxed, whether the beneficiary may change, and how the contribution fits into the grandparent’s broader financial and estate plan.
If you would like to discuss college funding, Trump Accounts, 529 Plans, gifting strategies, or multigenerational wealth planning, contact Nova Wealth Management or schedule a meeting with our team.
Source inspiration and referenced article:
Barron’s via AdvisorStream — Grandparents, Don’t Use Trump Accounts for College Savings
Disclosure: This content is for educational purposes only and should not be construed as personalized financial, investment, tax, legal, or educational-planning advice. Tax laws, account rules, contribution limits, and financial-aid treatment are subject to change. Nova Wealth Management does not provide legal or tax advice. Individuals should consult qualified professionals regarding their specific circumstances before opening, funding, converting, or taking withdrawals from any account.
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