The Republicans’ tax and spending legislation contains a number of provisions designed to encourage saving on behalf of children and young adults.
The law creates the Trump account, a new birth-based savings vehicle for American children. The megabill also expands the list of permitted qualified education expenses that trigger the tax benefits of IRC Section 529 education savings plans.
The new rules are more complicated than they may initially seem. Parents of young children should pay close attention to the details, especially the applicable tax provisions, when determining where to allocate their savings dollars. They also need to watch for ongoing guidance from the Treasury Department, the Internal Revenue Service and other federal agencies tasked with interpreting the law.
Trump Accounts: The Basics
Trump accounts serve any minor child younger than 18 in the year the account is established, has a Social Security number and for whom an election is made on their behalf. Presumably, a procedure will be established to allow the child’s parent or family member to formally elect to establish a Trump account on the child’s behalf. Contributions to such accounts will not be permitted before July 4, 2026.
Any individual can establish a Trump account on the child’s behalf. All accounts not directly formed under the Treasury Department’s pilot program must be funded via a “qualified rollover contribution,” a rollover of an existing Trump account balance where both accounts are established for the benefit of the same child. It seems, then, that an account must initially be established via the Treasury procedures.
If the parent elects, the federal government may provide a $1,000 contribution for beneficiaries born after 2024 and before 2029. Parents and other individuals can contribute up to $5,000 annually — the initial $1,000 funding does not count toward the $5,000 limit. Additionally, employers can annually contribute up to $2,500, which will not be included in the employee-parent’s taxable income.
Trump account funds must be invested in low-cost mutual funds or exchange-traded funds that track the returns of qualified indexes such as the S&P 500 or any index comprising primarily U.S. companies that trade regulated futures contracts on a qualified exchange. Indexes based on market capitalization are permitted investments, but industry-specific and sector-specific indexes are not.
Distributions are permitted only once the account beneficiary has reached age 18, at which point the Trump account is treated like an individual retirement account. Presumably, beneficiaries will be subject to a 10% early withdrawal penalty if they tap the funds before age 59.5, unless an exception applies, such as education expenses or first-time home purchases.
The general tax rules for Trump account funds are similar to those that govern after-tax contributions to IRAs. Distributions attributable to a parent’s (or private individual’s) principal contributions are tax-free and earnings are taxed at the beneficiary’s ordinary income tax rate. Amounts attributable to the initial $1,000 funding or an employer’s contributions are not included in the owner’s basis and are fully taxable upon distribution.
Trump account funds can also be rolled over to ABLE accounts maintained for the same child-beneficiary without tax liability in the year the child turns 17. The entire balance must be rolled over in a direct trustee-to-trustee transfer.
Section 529 Plan Expansion
The legislation also expands the rules governing Section 529 savings plans — and thus the tax preferences associated with qualified education expenses. Starting in 2026, the $10,000 limit on using 529 plan assets for K-12 education expenses will increase to $20,000.
The law also updates the definition of qualified education expenses, effective immediately. In the K-12 context, the following expenses are now qualified when paid in connection with a student’s enrollment in elementary or secondary public, religious or private school: (1) tuition, (2) curriculum and curricular materials, (3) books and instructional materials, (4) online educational materials, (5) tutoring or educational classes outside the home from a licensed (and non-related) educational instructor who is a subject matter expert in the relevant subject, (6) fees for standardized tests, (7) fees for dual enrollment in a higher education institution and (8) educational therapies for students with disabilities.
Postsecondary credentialing expenses are now also included as qualified education expenses. Any education expenses that would qualify in the context of enrollment in an eligible educational institution will now qualify if those expenses are incurred in connection with attending a recognized postsecondary credential program.
Fees for testing required to obtain or maintain the credential are also included, as are continuing education-related fees required to maintain a recognized postsecondary credential.
The term “recognized postsecondary credentials” is broadly defined, for example, to include occupational and professional licenses issued or recognized by a state or federal government, those accredited by reputable organizations, those listed in the Defense Department’s COOL directory and those identified by the Treasury secretary.
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