Trump Accounts, 529s, and the Grandparents’ Dilemma

I still remember buying my first bike. It was a Mongoose mountain bike from Walmart, and, as far as I was concerned, it might as well have been a brand-new car.

Walmart had this program called layaway. They would hold the item you wanted while you made payments until you had enough to bring it home. To afford that bike, I mowed lawns, did chores, sold lemonade, and put my birthday money from Grandma, Papa, and other relatives toward the purchase. If there was a way to make a few dollars, I was probably giving it a shot.

It took some time, but I got it done. To this day, it’s one of my fondest memories—not just because I finally got the bike, but because I learned how to get scrappy, get creative, and work toward something I wanted.

Looking back, I’m sure some of those relatives would have loved the opportunity to put a little money toward my future, too. Not instead of every birthday gift, but alongside it. Something that could keep working long after the birthday money was spent.

Fast-forward to today, families have several ways to do that. One of the newest is a Trump Account, which may come with a $1,000 head start from Uncle Sam for an eligible child. That raises a question for parents and grandparents: Where should you put the money you want to set aside for the next generation?

Set the politics aside. Understand the opportunity.

If you’ve been following the news, you’ve probably heard about Trump Accounts. Regardless of where your political allegiances lie, it’s worth understanding what they do before deciding whether they belong in your family’s plan.

A Trump Account is a type of individual retirement account for an eligible child under 18. The federal government offers a one-time $1,000 contribution for eligible U.S. citizens born between January 1, 2025, and December 31, 2028, who have valid Social Security numbers. That contribution must be elected; it isn’t simply $1,000 waiting for every grandchild, regardless of age.

Parents, grandparents, and others can also contribute. During the account’s childhood growth period, ordinary contributions share a $5,000 annual limit—not $5,000 per person contributing. Certain employer contributions count toward that same limit, while the government’s $1,000 pilot contribution does not. The limit is scheduled for inflation adjustments after 2027.

The investments are restricted to qualifying, low-cost funds tracking indexes of primarily U.S. stocks, such as the S&P 500. Generally, money cannot be withdrawn before January 1 of the calendar year the child turns 18. After that, traditional IRA rules generally apply. Think of it as a retirement head start, not a savings account they can empty whenever they want.

“But how much difference can $1,000 really make?”

Fair question. A thousand dollars probably isn’t going to change a child’s financial future overnight. But it can give them a starting point—and give the family somewhere to build.

If parents and grandparents collectively contributed $5,000 a year for 18 years, that would be $90,000 in family contributions before counting the government contribution or any investment gains or losses. That’s real money, even before discussing what compounding might do.

Of course, not every family can contribute $5,000 a year. That’s fine. The point isn’t to turn a contribution limit into another bill you feel obligated to pay. It’s to recognize that birthday money, holiday gifts, and smaller contributions over time can become something more intentional.

I also wouldn’t build the conversation around an assumed 11% annual return. Markets don’t hand out the same return every year, and there’s a difference between an illustration that looks exciting and a plan your family can reasonably follow. The contribution habit matters without needing the rosiest projection.

Turning 18 doesn’t mean the entire account gets taxed

Here’s where the details matter. The child doesn’t automatically owe income tax on the whole account simply because they reach adulthood. Once the account moves beyond its childhood growth period, traditional IRA distribution rules generally apply. Family contributions create tax basis, while investment earnings and certain other contributions can be taxable when distributed. Early withdrawals may also face a 10% additional tax unless an exception applies.

That means this isn’t simply a pot of tax-free spending money for an 18-year-old. It may be more valuable as the beginning of a long-term retirement account than as money to immediately withdraw.

And while qualified higher education expenses can provide an exception to the IRA early-withdrawal penalty, that does not automatically eliminate income tax. Avoiding a penalty and avoiding taxes are two different things. That distinction matters when comparing this account with a 529 plan.

What about college and financial aid?

For many families, retirement is not the first thing on their minds when a child turns 18. Tuition, student loans, and filling out the FAFSA tend to get their attention first.

One important clarification: a Trump Account is an IRA, not an ordinary custodial investment account. Current FAFSA guidance excludes noneducation IRAs from reportable investment assets. That means treating a Trump Account like a UGMA or UTMA account—and automatically applying the student-asset assessment—is not the right comparison under current rules. Families should still review the rules in effect when the child applies, including how any withdrawals affect the application.

This is why I wouldn’t choose an account based on one headline about financial aid. You have to look at what the account is designed to do, how the money will be used, and what happens when it comes out.

Don’t count out the 529

If education is the primary goal, a 529 deserves serious consideration. Earnings can grow free of federal income tax, and withdrawals are generally federally tax-free when used for qualified education expenses. That’s a meaningful distinction from an IRA withdrawal that may avoid an early-withdrawal penalty but still generate income tax.

And a 529 isn’t just for a traditional four-year college. Eligible uses can include qualifying vocational schools, registered apprenticeship expenses, and certain credentialing programs. So, “My grandchild might go into the trades” isn’t automatically a reason to rule one out.

There is also some flexibility if education plans change. Under specific rules, qualifying 529 funds can be transferred to the beneficiary’s Roth IRA, subject to a $35,000 lifetime limit, annual limits, account-age requirements, and other restrictions. It isn’t unlimited flexibility, but it’s worth understanding before assuming unused education money is stuck forever.

The grandparents’ dilemma: Which account should you choose?

Truthfully, there isn’t one “best account.” There is a best fit for the job you want the money to do.

If your priority is helping pay for education, start by evaluating a 529. If your priority is giving a child an early retirement foundation, a Trump Account may deserve a place in the conversation. And if the child qualifies for the government’s $1,000 contribution, understand how to claim that opportunity before deciding where additional family dollars should go.

It also doesn’t have to be all or nothing. A family might claim the eligible government contribution, direct education savings toward a 529, and revisit additional retirement contributions as their circumstances allow.

The important thing is to coordinate. Grandma may be thinking about college, Mom and Dad may be thinking about a first home, and Grandpa may just want to give the kid a head start. Those are all good intentions, but they aren’t necessarily the same goal.

Give them more than an account balance

When I think back to that Mongoose bike, the money mattered. But so did the work, the waiting, and the feeling of finally earning something I wanted.

That’s the part I wouldn’t want families to lose. Helping your children or grandchildren financially is a gift. Helping them understand how to save, invest, work toward a goal, and make thoughtful decisions with money is another.

The goal isn’t just to hand them a bigger account at 18. It’s to help them become someone who knows what to do with it.

So before you write the next birthday check, have the conversation. What are you trying to help fund? When might they need the money? And which account fits that purpose?

The best place to start isn’t with the newest account. It’s with a plan for the person you’re trying to help.

Here’s to planning well and living fully.

—Tyler