Open one if you want a tax-free way to save for your child's future and you can commit money for at least 18 years

A Trump Account (formally called a Coverdell Education Savings Account or ESA) lets you put money into an account for a child, invest it, and withdraw it tax-free when they use it for education or certain other expenses. The main reason to open one is the tax advantage: the money grows without being taxed, and you pay no tax when you take it out for may have access to expenses. The main reason not to open one is the 18-year lock-in — if you withdraw money before the account holder turns 18 (with rare exceptions), you owe taxes plus a 10 percent penalty on the earnings.

The decision comes down to three things: whether you have money you can leave untouched for years, whether your child will use it for the expenses the account covers, and whether the tax savings matter to your household. If you have $500 sitting in a regular savings account earning almost nothing, a Trump Account probably is not worth the paperwork. If you have $5,000 or more you plan to set aside for your child's education or training, it likely is.

Key Takeaways

  • Trump Accounts let you save up to $2,000 per child per year (total from all contributors) and withdraw the money tax-free for education, apprenticeships, and certain training programs.
  • Money you put in grows without being taxed, which saves you money compared to a regular savings account, but only if you leave it alone for years.
  • If you withdraw earnings before the account holder turns 18, you owe income tax plus a 10 percent penalty on those earnings, which can wipe out the tax benefit.
  • You can open a Trump Account at most banks and investment firms, and you control the account as the parent or guardian until the child reaches the age of majority in your state.
  • The account must be used for education or training expenses, or the money rolls over to a sibling; if no sibling uses it, you face taxes and penalties on the leftover earnings.

Who can open an account and how much you can contribute

You can open a Trump Account for any child under 18 as long as you have a Social Security number for them. You can contribute up to $2,000 per child per year, but that limit is shared across all people contributing to the same child's account — if a grandparent puts in $1,000, you can only add $1,000 more that year.

The $2,000 annual limit is per child, not per account. You can open multiple accounts for the same child at different banks, but the total contributions across all of them cannot exceed $2,000 in a single calendar year. If you go over, the excess is subject to a 6 percent excise tax, so it is worth tracking if multiple family members are contributing.

What expenses the account covers

You can withdraw money tax-free for tuition and fees at any school — public, private, or religious — from kindergarten through college. You can also use it for room and board if the child is enrolled at least half-time in college, and for books, supplies, and equipment required by the school. Starting in 2024, you can withdraw up to $35,000 to roll into a Roth IRA if the account has been open for at least 18 years and the child does not use all the money for education.

Apprenticeships and certain registered training programs also count as may have access to expenses. The IRS publishes a list of approved programs, so if you are considering a trade school or certification program, check that list before assuming it qualifies. If you withdraw money for something not on the list, you owe taxes and a 10 percent penalty on the earnings portion of the withdrawal.

The tax penalty if you need the money early

This is the biggest downside. If you withdraw money before the account holder turns 18 for any reason other than a may have access to expense, you owe income tax on the earnings (the money the account made through interest or investment gains) plus a 10 percent penalty. The money you contributed comes out tax-free, but the growth does not.

Example: You put $2,000 into a Trump Account when your child is 5. By age 12, the account has grown to $2,500 through investment returns. If you withdraw $2,500 to pay for something other than education, you owe income tax plus 10 percent penalty on the $500 in earnings. Depending on your tax bracket, that could be $150 to $200 in taxes and penalties on money that was supposed to be yours.

The penalty does not apply if the child receives a scholarship — you can withdraw the scholarship amount without penalty, though you still owe tax on the earnings portion. The penalty also does not apply if the child dies or becomes disabled, or if they attend a military academy.

Where to open an account and what to expect

You can open a Trump Account at most banks, credit unions, and investment firms. Call ahead or check their website to confirm they offer Coverdell ESAs, because not all institutions do. You will need the child's Social Security number, your own identification, and proof of address. The process usually takes a few days to a week.

Once the account is open, you decide how to invest the money — some institutions offer savings accounts that earn a small amount of interest, while others let you buy stocks, bonds, or mutual funds. The more aggressive your investment, the more the account can grow, but also the more it can lose. If you are saving for a child who is 5 years old, you have time to recover from market downturns. If the child is 15, a conservative investment usually makes more sense.

What happens if the money is not used for education

If the account holder reaches age 30 and there is still money in the account, you have 30 days to move it to another family member's Trump Account (a sibling, cousin, or even a parent or grandparent, depending on the relationship). If you do not roll it over, the remaining earnings are taxed and hit with a 10 percent penalty.

The rollover option is a safety net if your child gets a scholarship, attends a school that costs less than expected, or decides not to pursue higher education. You can move the money to a younger sibling's account or to a relative's account without penalty, as long as you do it within 30 days of the account holder's 30th birthday.

Trump Accounts versus 529 plans and other savings options

A 529 plan is similar to a Trump Account but has higher contribution limits (often $235,000 or more per child, depending on the state) and more flexibility. You can use 529 money for K-12 private school tuition, student loan repayment, and apprenticeships, in addition to college. The downside is that 529 plans are state-specific, and some states offer tax breaks only if you use their plan.

A regular savings account or money market account has no contribution limits and no penalties if you need the money early, but the interest earned is taxed every year. A Trump Account makes sense if you want the tax advantage and you are confident the money will be used for education. A 529 plan makes sense if you want more flexibility or higher contribution limits. A regular savings account makes sense if you might need the money for something other than education.

Frequently Asked Questions

Can I open a Trump Account if my child is already 15?

Yes, but the account must be closed by age 30, so you have only 15 years to use the money. If your child is close to college age, a Trump Account may not be worth opening because the money will not have much time to grow tax-free. A 529 plan or regular savings account might be a better choice.

What happens if my child gets a full scholarship?

You can withdraw the scholarship amount from the Trump Account without the 10 percent penalty, though you still owe income tax on the earnings portion of that withdrawal. Any money left over can stay in the account or be rolled to a sibling's account.

Can I change my mind and close the account?

Yes, but if you withdraw money for non-education expenses, you owe taxes and a 10 percent penalty on the earnings. If the account has lost money due to market downturns, you can withdraw without penalty because there are no earnings to tax.

Do I need to report the Trump Account on my taxes?

You do not report contributions, but you do report any earnings when you withdraw them. The financial institution will send you a form showing how much of each withdrawal is earnings versus contributions. Keep records of all contributions so you can prove how much you put in.

What if I want to invest the money in stocks instead of leaving it in savings?

Many institutions let you choose how to invest Trump Account money. You can buy mutual funds, individual stocks, or bonds. More aggressive investments can grow faster, but they also carry more risk. Consider your child's age and how much time the money has to recover from market downturns before deciding.