Saving for children and grandchildren: 2026 update
In addition to being the 250th anniversary of American independence, this July 4th brought a new custodial and IRA-style account onto the scene – Trump Accounts. Parents looking to save for their children now have custodial accounts (in both IRA and fully taxable flavors), Trump Accounts, and 529 education savings accounts to consider. With all of these choices - including the new Trump Accounts on the market - parents may be wondering what accounts make the most sense for them and their families. To help parents make sense of the new Trump accounts, we are updating an earlier writeup of options to account for this new development.
What are custodial accounts?
Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are set up by an adult for the benefit of a minor. The accounts remain under the control of the custodian until the child reaches a specified age (e.g., 18) when the beneficiary receives full control of the account. State law will impact the age at which the minor will receive full control of the account, with Virginia allowing the transition to be delayed to as late as age 25. A custodial account can be established as an IRA if the child has earned income, or as a fully taxable brokerage account.
What are Trump Accounts?
Officially known as 530A retirement accounts but commonly called Trump accounts, these accounts may be established by parents, guardians and other authorized individuals for their children. The accounts have a $5,000 annual contribution limit, offer tax deferred growth and can be opened for a child who has not turned age 18 before the end of the calendar year in which the election is made and has a valid Social Security number. During the growth period (prior to the child turning 18), funds grow tax deferred and distributions are not allowed, except to roll the funds into an ABLE account for disabled individuals. At age 18, the account functions like a traditional IRA. At present, the accounts offer only one investment option: an index fund tracking the S&P 500. Under a pilot program, the US Treasury will seed Trump accounts with $1,000 for eligible children born between Jan. 1, 2025, and Dec. 31, 2028. Parents will also want to follow the recent IRS proposal to allow parents to make pretax contributions to the accounts directly from their paychecks. If finalized, such pretax contributions would be a potential boon to savers, in particular those in higher tax brackets.
What are 529 education savings accounts?
A 529 account can be set up for anyone and is a tax-advantaged account made specifically for education savings like college, trade school, vocational school, and - with some limits - K-12. 529 plans will vary by state, with Virginia’s plan offering a state tax deduction for contributions up to $4,000 per account. In all states, funds grow tax free for qualified education expenses, and there are no annual contribution limits (although federal gift tax reporting may apply to contributions over $19,000).
How to chose which account(s) make sense for you?
The account or accounts that makes the most sense will likely depend on the parent’s goals as well as the child’s needs, income, and birth date and zip code. A financial advisor can offer personalized individual recommendations to best meet a parent’s goals and interests.
However, in some situations, opening certain accounts may be a no brainer for a parent looking to save for a child. For one, if the child in question has a birthdate between January 1, 2025 and December 31, 2028 and is eligible for the Federal seed money, opening a Trump account likely makes sense. The free $1,000 gifted to a newborn could grow to over $57,000 by age 60, even without any parental contributions (assuming a 7% rate of return). Similarly, if the child would be eligible for one of the smaller seed money programs that depend on location, or if the parent’s employer will make contributions, the Trump account will have these unique advantages and will generally be worth establishing.
If saving for a child’s future college or other educational expenses is the goal, families will generally find a 529 account to be the most advantageous. The combination of tax free growth, potential state tax deduction, flexibility, and low impact on Federal financial aid calculations make 529 accounts the winner for families prioritizing educational savings. If the child does not end up needing some of all of the funds, there is significant flexibility. The beneficiary can readily be switched and, with the passage of the Secure 2.0 Act in 2022, 529 accounts now allow for up to $35,000 in Roth conversion of unused funds subject to annual limits and account history requirements.
If saving for a child’s future education expenses is not the goal and the child has earned income, a tax advantaged custodial account would likely be the most attractive option. Parents can make contributions to custodial IRA accounts on behalf their children up to lower of the child’s earned income or $7,500 annually. These contributions can have major compound benefits. Establishing a Roth IRA custodial account (as opposed to traditional IRA) may be especially beneficial considering the child is likely in a low tax bracket locking in tax free growth into the future at a low (or possibly no) tax cost now.
Early savings can have large benefits
Regardless of which account is optimal for a family’s unique situation, getting an early start on savings goals for children can make a big difference. The longer funds can be invested, the greater the benefits of compound growth setting families up for a greater chance of achieving their goals. Talking with a financial planner can help parents prioritize the right accounts and investments for their children and help fit those investments into the family’s broader financial plan.
GuidePoint Financial Planning - A Reston Virginia Financial Advisor - Virginia 529 Tuition Track
Ryan Phillips, CFA, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.
SIGN UP TO RECEIVE GUIDEPOINT: NEWS THAT MATTERS BY E-MAIL
All material above is for educational purposes only and is no way a recommendation to buy or sell investment securities. You should always review investment and tax changes with qualified professionals.
