Trump accounts vs. 529 plans: Saving for your child’s future

00:00 Speaker A

The Trump backed tax bill being considered in the Senate right now contains investment accounts for newborns. So how does this stack up against the more traditional 529 savings plan here to break it down. We’ve got our personal finance news senior editor Molly Morehead. Molly, give us some more details around this Trump account.

00:26 Molly Morehead

Hey Brad. Uh so the Trump accounts as described in the house bill are also a mechanism for funding a child’s education, not exactly like a 529, but kind of some of the same bones. But they also have the flexibility of uh you can use the money for a first home purchase or for startup money for a new business. Uh so you know, the talk about I’m not sure if my child’s going to go to college. These accounts have a few more uses that 529s don’t. However, uh they are limited to $5,000 a year in contributions. Um the thousand dollars in the bill would apply for newborns born between this year and 2028 and that’s seed money from the government. Uh for everyone else though, uh you can put in $5,000 a year. It grows tax deferred, uh and then when you take it out, you’ll pay uh the capital gains rate.

02:10 Molly Morehead

So the they’re kind of a companion to 529s.

02:27 Speaker A

So how does that compare to a 529 savings plan then?

02:36 Molly Morehead

Right. Well, 529s, as you all just discussed, are limited to education expenses, uh although there is that that Roth IRA rollover as well as um student loans and K-12. So they really have a lot of flexibility within the realm of education costs. But the biggest difference is that the contribution limit to a 529 is is at a rate most of us will never hit. States set limits on them based on the cost of a higher education in the state, but it’s it’s over six figures. So you’re not going to hit a ceiling more than likely on how much money you can put in. It also grows tax deferred and then the big key difference is that it comes out tax free when you spend it on education costs. So again, the Trump account has a preferred rate of the capital gains rate, but a 529 tax free when you withdraw it and spend it on education.

04:20 Speaker A

Molly, thanks so much for breaking this down.

04:25 Molly Morehead

Sure thing.