By Carl Zacharia
The “One Big Beautiful Bill” introduces Trump accounts (originally “MAGA accounts”), giving families a potential alternative to traditional 529 education savings plans. While both can fund college costs, they differ significantly in structure, benefits, and government assistance implications.
What Are Trump Accounts?
Trump accounts finance college costs and early-adulthood milestones like first-time home purchases or small business launches. Parents or guardians can open one account per child under 18, contributing up to $5,000 annually (indexed for inflation). The Treasury automatically seeds accounts with $1,000 for U.S. citizens born between January 1, 2025, and December 31, 2028.
All contributions flow into a single diversified U.S.-stock index fund. Children cannot access funds before age 18, and after that, distributions follow traditional IRA rules. Withdrawals before age 59½ incur a 10% penalty plus ordinary income tax, though exceptions exist for qualified education expenses and first-time home purchases (up to $10,000). Earnings grow tax-deferred, and all withdrawals are taxed as ordinary income. Parents retain tax basis on their post-tax contributions, meaning only the growth portion is taxable.
529 Plans: The Established Alternative
529 plans offer superior tax treatment with tax-deferred growth and tax-free withdrawals on qualified education expenses. Unlike Trump accounts’ single investment option, 529s provide age-based portfolios, index funds, and actively managed options. They have no federal contribution caps, with state limits often $400,000-$550,000+, and allow immediate access for qualified education expenses.
Key Advantages and Disadvantages Trump Account Pros:
• Built-in goal diversification for non-traditional career paths
• $1,000 government seed money compounds over 18+ years
• Simple investing with one broad market fund
• Flexibility for down payments and entrepreneurial ventures
Trump Account Cons:
• Limited investment choice without bonds or international exposure
• $5,000 annual cap insufficient for six-figure tuition costs
• Significant tax disadvantage: Withdrawals taxed as ordinary income (potentially 22-37%) versus 529s’ tax-free withdrawals
529 Plan Pros:
• Tax-free withdrawals unbeatable for education-focused families
• Higher contribution limits and investment flexibility
• Immediate access for qualified expenses
• Better financial aid treatment as parent-owned assets
529 Plan Cons:
• No government seed money
• Penalties for non-qualified withdrawals
• Limited flexibility for non-education goals
Critical Financial Aid and Medicaid Implications
Financial aid treatment also creates differences. Trump account balances will likely be treated like UGMA/UTMA custodial assets on the FAFSA, counted as student property and assessed at higher rates than parent-owned 529 assets, potentially reducing need-based aid eligibility.
For Medicaid qualification, both account types present planning challenges. 529 plans are generally considered countable assets when determining eligibility. Family members applying for Medicaid long-term care benefits typically must spend down 529 money before coverage begins. This creates difficult situations because using 529 funds for medical expenses instead of education triggers taxes and penalties.
Trump accounts face similar scrutiny for Medicaid qualification. Since holders can access funds at 18 (though with penalties before 59½), these balances would likely be considered available resources for Medicaid purposes. It also appears that Trump accounts will likely follow traditional IRA rules, allowing funds to remain invested long-term. However, the penalty-free access for education expenses and first-time home purchases may still complicate Medicaid asset calculations, as these exceptions could make funds more readily available than traditional retirement accounts.”
Tax Impact Analysis
The tax treatment difference is substantial. Consider investing $1,000 annually at 7% return over 18 years:
• Total growth: Approximately $16,000 in earnings
on $34,000 total
• 529 plan: $0 tax on qualified education withdrawals
• Trump account: $16,000 taxed as ordinary income
(potentially $3,520-$5,920 in taxes at 22-37% rates)
This tax disadvantage erodes Trump accounts’ value for education savings compared to 529 plans.
Strategic Considerations
Parents might choose Trump accounts for the $1,000 seed money and flexibility but lose 529 plans’ superior tax benefits for education expenses. This highlights the importance of understanding how these accounts complement rather than compete with existing strategies.
For education-focused families, 529 plans’ tax advantages remain compelling. However, Trump accounts offer unique flexibility, allowing children to use funds for diverse post-high school paths without penalties.
Bottom Line
Trump accounts won’t replace 529 plans but provide a flexible second option for diverse post-high school goals. The accounts offer unique benefits—government seed money and goal flexibility—but include significant trade-offs like limited investment options, contribution caps, and ordinary income tax treatment that 529s avoid.
Families should maintain current 529 savings strategies while considering Trump accounts as a supplementary tool. Understanding both immediate benefits and long-term consequences, including financial aid and Medicaid impacts, is essential for decisions aligning with comprehensive financial planning goals. The advantageous tax treatment makes 529 plans more attractive for education savings, while Trump accounts serve better as flexible starter funds for various life goals.
Bonita Springs
26811 South Bay Drive, Suite 260
Bonita Springs, FL 34134
(239) 345-4545
Lakewood Ranch
8470 Enterprise Circle, Suite 300
Lakewood Ranch, FL 34202
(239) 345-4545