As families navigate the complexities of saving for their children’s education, two significant options have emerged: 529 plans and Trump Accounts. Each plan has special, distinct perks that make them really accessible and attractive to a large number of parents. Beginning in 2024, the financial picture for these accounts will change again, providing families with more ways to grow their savings.
529 plans are tax-favored investment accounts intended to be used for educational expenses. Similar to Roth IRAs, contributions to these plans grow tax-free, and withdrawals are tax-free if used for qualified education expenses. These costs cover tuition, fees, and books in addition to room and board. 529 plans allow for much larger contributions than Trump Accounts. This enables grandparents or other “non-parent” givers to give up to $19,000 per grandchild without affecting their own lifetime gift tax exemption. For married couples filing jointly, the amount doubles to $38,000.
The same 529 plans that must be used for qualified higher education expenses are not limited to that use. They allow families to put money towards continuing education classes, apprenticeship programs, and even student loan payments. Beginning in 2024, you can transfer unused funds from a 529 plan into the account beneficiary’s Roth IRA. Even better, this transfer will be free of all income taxes and tax penalties. This shift sheds light on the increasing flexibility of 529 plans, making them an effective long-term savings vehicle.
Trump Accounts—officially known as “Money Accounts for Growth and Advancement” or “MAGA Accounts”—provide additional options for families. These accounts can be used for educational expenses, obtaining credentials, making down payments on first homes, or even launching small businesses. Trump Accounts provide tax advantages for saving early that 529 accounts do, making them even more enticing.
Senator Ted Cruz, to his credit, is a big supporter of Trump Accounts. He underscores their role in promoting compound interest and providing families vehicles to build wealth. He stated, “the miracle of the compound growth, the ability to accumulate wealth, which is transformational.”
Trump Accounts don’t have any income restrictions. Any family with a U.S. citizen child and both parents in possession of Social Security numbers can open one without much trouble. This inclusivity means that many more demographics can take advantage of the savings potential these accounts provide.
And as Chris McGee, chair of the College Savings Foundation, recently said, both savings vehicles are critically important. He noted that “we continue to believe that 529 plans provide tremendous benefits as a tax-advantaged savings vehicle for American families.” This announcement serves as a reminder of how dependable 529 plans have been on the educational savings playing field for years.
Some families may want one option more than the other. Experts widely agree that to get the most benefits, both accounts need to be used and in tandem. Winnie Sun, co-founder and managing director of Sun Group Wealth Partners, remarked on this strategy: “My recommendation would be, if you’re focused on college savings, talk to an advisor and start with the 529 plan first.” She noted that for families with teenagers, 529 plans continue to be the better option as they allow investments to grow federal tax-free.
It’s true that Trump Accounts can go hand-in-hand with smart, common-sense saving, explained Sam Taube, lead investing writer at NerdWallet. He said that these accounts could “certainly help a lot of families at a lot of different income levels.” He stressed that the tax treatment for Trump Accounts is no different from that of a standard brokerage account.
The debate over educational savings will undoubtedly persist as families consider their choices in the wake of these changes. Both 529 plans and Trump Accounts are changing fast. Parents need to work with trusted financial advisors to determine the best path forward for their individual circumstances.
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