529 vs. Trump Accounts: Comparing Education Savings Options for Families

Education savings can be a daunting topic - costs of higher education have increased significantly in recent years, and families have new options to save and invest.

Each option serves a different purpose and has unique benefits. Investors should consider their investment timeline, tax implications, and their flexibility to use the funds.

Common investment strategies include: 529 accounts, Coverdell accounts, Trump accounts, and taxable (non-qualified) investments. Your situation is unique, so our financial advisors can help you navigate the decision.

529 Plans: Tax benefits for education costs, with penalties for nonqualified uses

For many families, 529 plans remain the preferred method to save for education.

Key benefits include:

• Any U.S. resident with a SSN or TIN can own a 529: parents, grandparents, relatives, or friends. One child is named as the "beneficiary" (recipient) of the funds. The owner retains full control.
• The 529 owner can name a successor owner, who would manage the account if the owner passes away before funds are used.
• Anyone can contribute to a 529, but those contributions are subject to federal gift tax limits. Gifting less than the IRS reporting limit (in 2026, $19,000 per year for singles or $38,000 for married couples) won't trigger federal reporting requirements.
• Investment options vary by plan. Your investment choices should consider your risk tolerance, growth expectations, and time horizon.
• Many states sponsor 529 plans, but you do not need to open a plan in your own state. Look at your state's plan, as it may offer tax benefits, or consider an out-of-state plan if it meets your family's needs.
• The owner of the 529 plan, not the beneficiary, controls the investment decisions.

Limited penalty-free uses:

• Using the 529 funds for "qualified education expenses" will allow you to spend the funds without paying federal income tax on investment earnings. Higher education expenses, as well as K-12 expenses (subject to limits) can qualify - check the IRS rules for detailed rules.
• Using 529 funds for expenses that don't qualify will incur income tax on the gains, as well as a 10% penalty.

What if I overfunded the 529?

Recent rule changes expanded the options for distributing funds from a 529. If your child chooses not to attend college or receives scholarships, they may end up with more 529 funds than needed.

• Subject to limits, 529 funds can be converted to Roth IRA funds for the beneficiary. However, the 529 account must have been open for 15 years, and contributions must have been in the account for at least 5 years. There's a lifetime maximum of $35,000 for this type of transaction, as well as a per-year limit which adjusts annually ($7,500 in 2026).
• You can change the beneficiary of the 529 plan to another family member of the beneficiary (spouse, child, sibling, cousin, etc.) Gift taxes might apply, so check with your tax preparer.

Coverdell Education Savings Account (ESA): Subject to stricter limits

Compared to a 529 plan, a Coverdell account is subject to stricter limits. The maximum annual contribution is $2,000/student, and income restrictions apply to the owner (in 2026, $110,000/year for single filers and $220,000/year for married filers.) Funds generally must be used by age 30, or they may be subject to taxes and penalties (with some exceptions).

Due to these stricter requirements, 529 plans are more popular than Coverdell accounts.

Trump Accounts: A newer option with potential $1,000 initial contribution

In 2025, Trump Accounts made headlines by offering $1,000 of seed money to U.S. citizens born between 2025 and 2028. Applications for these accounts are currently only offered directly through the U.S. Government, although financial advisors may be able to manage these in the future.

In addition to the seed money, relatives and their employers can contribute a combined maximum of $5,000/year to the Trump account, based on current limits.

Withdrawals are generally restricted before age 18. After that point, the account may follow rules similar to a traditional IRA. Based on current rules, qualified withdrawals are allowed at that time for:

• Higher education expenses (unlimited)
• First-time home purchase ($10,000 maximum)
• Birth or adoption expenses ($5,000)
• Withdrawals after age 59 ½
• Other limited uses

The penalty for early or non-qualified withdrawals is 10% on the taxable portion, in addition to ordinary income tax.

Trump accounts are new, and it's possible that rules will change in the coming years. One unique aspect to the Trump account is that the child becomes the sole owner of the account at age 18, making all investment and withdrawal decisions after that date.

Non-qualified (taxable) investment accounts: No tax benefits, no limits

One flexible method of saving for a child's education is a taxable investment account. You'll owe taxes on realized capital gains, dividends, and interest. However, there's no limit to how much you can contribute, and no penalties for using the funds for another purpose.

Considerations for your situation

A financial advisor can help you navigate the many options available to you. At your meeting, you'll discuss the following:

• Is the child eligible for the Trump account seed money (born 2025-2028)?
• Are you comfortable with the child taking full control of the funds at age 18?
• Is higher education a likely goal? If the funds aren't needed for education, would you be willing to pay a penalty?
• Does your state's 529 plan offer tax benefits?

Contact Us

To review your education savings options, we welcome you to schedule a meeting.

Contact Fiona Morina, Administrative Assistant for Jane M. LaLonde, CFP®, at 612.431.7509 or Fiona@LWAG.com.

Our address: 2701 University Ave SE, Minneapolis, MN 55414