A Trump Account is worth it if you want a tax-free way to save for a child's future expenses and can commit to the annual contribution limit

A Trump Account (formally a Coverdell Education Savings Account, or ESA) lets you set aside up to $2,000 per year per child in an account that grows tax-free. You pay no federal tax on the earnings when you withdraw the money for may have access to expenses — which include tuition, books, room and board at college, and K-12 private school tuition. If your household income is below certain thresholds, this is a real advantage over saving in a regular bank account or taxable investment account.

The trade-off is that the money must be used for education or withdrawn by age 30, or you'll owe taxes and a 10 percent penalty on the earnings. You also cannot contribute if your income exceeds the limit set by the IRS each year (this varies annually). Whether it's worth opening depends on your income, how much you can actually save each year, and whether you're confident the money will be spent on education.

Key Takeaways

  • You can contribute up to $2,000 per year per child, and the money grows tax-free if used for education expenses including K-12 private school tuition, college costs, and books.
  • Your household income must fall below the IRS limit to contribute; for 2024, the phase-out begins at $110,000 for single filers and $220,000 for married couples filing jointly, though these amounts change yearly.
  • Any money not used by age 30 must be withdrawn, and earnings on unused funds are taxed as income plus a 10 percent penalty.
  • A Trump Account makes the most sense if you have a child under age 10, expect to use the money for education, and your income is below the contribution limit.

How the tax-free growth actually works

When you put $2,000 into a Trump Account, that money can be invested in stocks, bonds, mutual funds, or other securities depending on the account provider. Any gains — dividends, capital appreciation, interest — accumulate without triggering federal income tax each year. In a regular taxable account, you'd owe tax on those gains annually, which reduces what's available to grow.

The tax savings are real but depend on how much the account grows. If you contribute $2,000 a year for 10 years and the account earns 6 percent annually, you'd have roughly $26,400 at the end. In a taxable account, you'd owe tax on the earnings each year, which could cost you $1,000 to $2,000 depending on your tax bracket. In the Trump Account, you owe nothing if the money is used for education.

The catch: if you withdraw money for non-education expenses, you pay income tax on the earnings portion plus a 10 percent penalty. So if your account has $5,000 in contributions and $1,000 in earnings, and you withdraw $3,000 for something other than education, you'd owe tax and penalty on the $600 of earnings in that withdrawal.

Income limits that may disqualify you

The IRS sets an income threshold above which you cannot contribute to a Trump Account. For 2024, the phase-out range is $110,000 to $125,000 for single filers and $220,000 to $235,000 for married couples filing jointly. If your modified adjusted gross income (MAGI) falls in that range, your contribution limit is reduced. If it exceeds the upper limit, you cannot contribute at all.

These limits change each year, usually increasing slightly. You can check the current year's limit on the IRS website or ask your tax preparer. If you're close to the limit, your contribution room may shrink or disappear depending on your income that year. This is a real constraint for higher-earning households.

The age-30 deadline and what happens if money is left over

All money in a Trump Account must be distributed by the time the beneficiary turns 30. Any funds still in the account after that date trigger a withdrawal, and you'll owe income tax on the earnings portion plus a 10 percent penalty. This is different from a 529 plan, which has no age limit and can be rolled to a sibling or used for graduate school.

If your child doesn't go to college or uses only part of the money, you have a few options. You can roll unused funds to a sibling's Trump Account if they're under 30 and you haven't already contributed $2,000 to their account that year. You can also withdraw the contributions (which you already paid tax on) without penalty, and only the earnings portion triggers tax and penalty. But if you have $10,000 in the account at age 30 and only $6,000 was contributed, you'll owe tax and penalty on the $4,000 in earnings.

When a Trump Account makes more sense than other options

A Trump Account is most useful if you have a young child (under 10), expect to use the money for education, and your income is below the contribution limit. The longer the money sits, the more it can grow tax-free. A child born today could have 18 years of growth before college, which compounds significantly.

A 529 plan, by contrast, has no income limits, no age deadline, and allows much larger annual contributions (often $235,000 or more per beneficiary, depending on the state). If your income exceeds the Trump Account limit or you want to save more than $2,000 per year, a 529 is the better choice. If you're not sure the money will be used for education, a 529 also offers more flexibility — you can change beneficiaries to a sibling or use it for graduate school without penalty.

A regular savings account or taxable investment account has no restrictions and no tax benefits, but you'll owe tax on earnings each year. A Trump Account wins if you can use the $2,000 annual limit, your income qualifies, and you're confident about education spending.

What counts as a may have access to education expense

may have access to expenses include tuition and fees at any accredited college, university, or vocational school; room and board if the student is at least half-time; books and supplies; computers and equipment; and K-12 private school tuition. Starting in 2024, up to $35,000 can be rolled from a Trump Account to a Roth IRA if certain conditions are met, though this is a complex transaction best discussed with a tax professional.

Expenses that don't count include room and board at graduate school, student loan repayment, test prep courses, and transportation. If you're unsure whether an expense qualifies, ask the account provider or your tax preparer before withdrawing.

The real cost of getting it wrong

The main risk is having money left over at age 30. If you contribute $2,000 a year for 18 years and the account grows to $50,000, but your child only uses $30,000 for college, you'll owe income tax and a 10 percent penalty on the earnings in the remaining $20,000. Depending on your tax bracket, that could be $2,000 to $4,000 in taxes and penalties.

A secondary risk is that your income rises above the limit in a future year, preventing you from contributing. If you're self-employed or have variable income, this is worth monitoring. You can only contribute if you're under the limit at the time of contribution, so a high-income year could close the door.

Frequently Asked Questions

Can I open a Trump Account if my income is too high?

No. If your modified adjusted gross income exceeds the IRS phase-out range, you cannot contribute. For 2024, that's above $125,000 for single filers and $235,000 for married couples filing jointly. A 529 plan has no income limits and may be a better fit.

What happens if my child gets a scholarship?

You can withdraw an amount equal to the scholarship without owing the 10 percent penalty, though you'll still owe income tax on the earnings portion of that withdrawal. The contribution portion can always be withdrawn tax-free.

Can I use Trump Account money for graduate school?

Yes, graduate school tuition and fees count as may have access to expenses. Room and board at graduate school does not. A 529 plan offers more flexibility for graduate education, including student loan repayment up to certain limits.

What if I want to change the beneficiary?

You can roll unused funds to a sibling or other family member under age 30, as long as you haven't already contributed $2,000 to their account that year. The rollover itself is not taxed, but you're still subject to the annual contribution limit for the new beneficiary.

Is a Trump Account better than a 529 plan?

It depends on your income and how much you can save. A Trump Account has no income limits for 529 plans and allows larger contributions. A Trump Account has an age deadline and lower annual limits but offers the same tax-free growth for education. If your income exceeds the Trump Account limit, a 529 is your only choice.