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When Congress creates a new tax-deferred account type, it’s easy to assume that it must be better than what already exists.
That seems to be a bit of what’s happening with the new Trump Accounts, which is a new, tax-advantaged way to save for a child and doesn’t perfectly match anything families have had before.
It has some features that make it resemble a retirement account and others that make it feel a bit like a child savings vehicle. So in this episode, I want to walk through how these accounts work and, more importantly, how they compare to the other tools families already have for saving for a child.
Because to me, this is less about whether Trump Accounts are good or bad.
The better question is this: what leaves a child in the best position after taxes, with the most flexibility, and the fewest future headaches?
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Why Trump Accounts Will Appeal To A Lot Of Parents
There is something powerful about the idea of starting a child early with a dedicated investment account. The earlier the money goes in, the more time it has to compound. And when you combine that with a tax-advantaged wrapper, it is easy to see why parents and grandparents will be drawn to it.
Trump Account contributions are made with after-tax dollars, so there generally isn’t an upfront deduction, but the savings grow tax deferred. So it’s a lot like a non deductible Traditional IRA. The big difference, though, is that Trump accounts don’t require the child to have earned income, which historically has been a barrier for people wanting to contribute to a child’s retirement account.
Another attractive feature of these accounts is that a lot of different people can potentially help fund them. Parents, grandparents, relatives, and friends may all be able to contribute. Employers can also contribute up to $2,500 per year under current guidance, although the IRS has indicated that employer contributions count toward the general $5,000 annual limit. Contributions from governments and charities are treated differently and generally do not count toward that cap.
What Happens When The Child Wants to Use The Money?
This is where the account starts to look much more like a traditional retirement account.
In general, this is not meant to be a spendable account during childhood. Once the child reaches age 18, the account is expected to convert into a traditional IRA, and from that point forward the usual IRA framework takes over.
That means the after-tax contribution portion can come out without being taxed again, but the growth, along with any untaxed employer, government, or charitable contributions, would generally be taxed as ordinary income when withdrawn. And if money is taken out before the normal retirement-account rules allow it, penalties may apply.
What $5,000 A Year Could Become
So we basically have a Traditional IRA for kids here.
Suppose you contribute $5,000 per year for a child or grandchild or niece/nephew or friend for the first 18 years of their life, and the account earns 8% annually, the account would be worth roughly $202,231 by age 18.
Of that amount, $90,000 would be contributions and about $112,231 would be investment growth.
That is enough to make almost any parent or grandparent stop and pay attention.
And if the beneficiary did nothing else with the account other than let it continue compounding at the same 8% annual rate, it could grow to roughly $5.12 million by age 60.
That’s why people will like these accounts. And to be fair, it sounds pretty good. But I know from working with our clients—and I know this will be true for many of you listeners—when it comes time to take the money out, you have a big tax bill to deal with.
Why Tax Deferral Isn’t Automatically Better
One of the easiest mistakes in tax planning is assuming that delaying taxes automatically improves the outcome.
Sometimes it does.
Sometimes it absolutely does not.
Because Trump Accounts borrow heavily from the traditional IRA playbook, they can create some of the same issues that make large traditional IRAs tricky later in life.
The longer the money compounds, the larger the share of the account that may eventually be taxed as ordinary income. And ordinary income treatment is usually much less attractive than qualified dividends or long-term capital gains treatment in a taxable account.
That is the part I think many people will miss.
The same feature that makes the account sound powerful at the beginning—decades of uninterrupted tax-deferred growth—can create a very different outcome down the road when the money finally starts coming out.
There is also a recordkeeping issue that should not be ignored.
Because Trump Accounts can contain both after-tax contributions and amounts that have never been taxed, someone has to keep track of what portion of the account has already been taxed. That responsibility may start with a parent or guardian, but eventually it gets handed off to the child.
And if that recordkeeping slips over time, the tax consequences can get messy.
That is not a small drawback. It is a reminder that complexity has a cost, even when the account itself sounds attractive.
Why A Plain Custodial Account May Be Better Than People Think
This is where I think a lot of people underestimate the simple option.
When people hear “taxable account,” they often assume “inferior.”
But taxable does not automatically mean worse.
A taxable custodial account can be surprisingly efficient if the family understands how the tax rules work and manages the account thoughtfully.
Under the kiddie tax rules, a child can have some unearned income taxed on very favorable terms. In 2026, the first $1,350 of unearned income is effectively sheltered, the next $1,350 is taxed at the child’s rate, and only after that do you generally start running into the parents’ marginal rate.
That creates an opportunity.
A family may be able to realize some gains along the way, reinvest the proceeds, and steadily increase the child’s cost basis over time.
And that higher basis matters.
It means less embedded gain later. It means less future tax when the money is eventually sold. And it means the account is not quietly building toward one large future ordinary-income problem.
That is why a custodial account can look less impressive at first glance but still produce a cleaner after-tax outcome.
This is one of those situations where the plain, unspectacular option can be better than the flashy new one.
The Other Hidden Advantage: Flexibility
But taxes are only part of this.
For many families, the bigger advantage of a custodial account may be flexibility.
A retirement account is built around retirement-account rules. That means access is more limited, tax planning is more complicated, and the money is effectively being told what its job is far in advance.
A custodial account does not solve every problem, but it keeps your options open.
And I think that matters more than people realize.
Maybe the money helps with a first car.
Maybe it becomes part of a down payment someday.
Maybe it turns into a young adult’s first real brokerage account.
Maybe it simply stays invested and becomes an early financial foundation.
That flexibility has real value, especially when families are saving for a child but are not yet certain what the eventual goal will be.
Where 529 Plans Still Fit In
None of this means 529 plans suddenly become less useful.
In fact, if the primary goal is education, I still think a 529 deserves first consideration.
A 529 gives you tax-free growth and tax-free withdrawals for qualified education expenses. And now there is also a limited ability to roll unused 529 assets into a Roth IRA for the beneficiary, subject to the rules. Under current guidance, that rollover opportunity has a $35,000 lifetime cap, the 529 must generally have been open for at least 15 years, and recent contributions are not eligible.
That matters because it softens one of the biggest fears people have always had about 529s: what happens if I save too much?
It does not eliminate that concern entirely, but it gives families a more graceful off-ramp than they used to have.
So this is not really a winner-take-all contest.
It is better to think about these accounts based on the job the money is supposed to do.
If the goal is education, a 529 often makes the most sense.
If the goal is broad flexibility and tax-managed investing for a child, a custodial account may be more attractive than many people realize.
If the goal is to capture a government seed contribution or take advantage of this new account structure specifically, a Trump Account may have a role.
But that is very different from saying it should automatically become the default home for every dollar saved for a child.
The Important Caveat
There is one major caveat that has to be part of this discussion.
Custodial accounts can be a negative in financial aid calculations.
Official FAFSA guidance says UGMA and UTMA accounts are treated as student assets. By contrast, qualified education savings accounts such as 529 plans are generally reported as parent assets when the student is required to report parent information. Retirement plans are not counted as investments for this purpose.
That does not invalidate the case for custodial accounts.
But it does mean families who expect need-based aid to matter should think carefully before treating a custodial account as the obvious answer.
Again, the right answer depends on the job the money is supposed to do.
My Bottom Line
The right way to evaluate any savings vehicle is to ask a better set of questions:
- What is the money for?
- How flexible does it need to be?
- What will the after-tax outcome likely look like, not just next year, but decades from now?
- And what complexity am I introducing in exchange for the perceived tax benefit?
For many families, the surprising answer may be that a plain old taxable custodial account is not the compromise option.
It may be the smarter one.
That does not mean Trump Accounts are useless. They may absolutely make sense in some situations, especially where outside contributions create free money.
But parents should be careful not to confuse novelty with superiority.
A perfect portfolio is not just about owning the right investments. It is also about holding them in the right types of accounts, for the right reasons, with a clear understanding of the tradeoffs.
And sometimes the best solution is not the one that sounds the most exciting.
It is the one that leaves you with the fewest regrets later.
The Long Term Investor audio is edited by the team at The Podcast Consultant
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