# Investing for Your Kids: Trump Account, 529 or Custodial?

Source: https://cluenex.com/learn/portfolio-management/investing-for-your-kids/
Publisher: Cluenex (https://cluenex.com)
Updated: 2026-10-15

## Short answer

Four containers can hold money for a child: a Trump Account, a 529 plan, a custodial UGMA/UTMA account, or your own brokerage account. They differ on tax, who owns the money and how financial aid counts it. A 529 suits tuition, a Trump Account suits long-term money, and a parent account keeps the most flexibility.

## Key takeaways

- Trump Accounts are a new kind of traditional IRA for children, created by the One Big Beautiful Bill Act signed July 4, 2025. Contributions can start July 4, 2026, with a $5,000 yearly limit.
- A one-time $1,000 federal seed is available for US citizen children born January 1, 2025 through December 31, 2028, claimed on IRS Form 4547. It does not count toward the $5,000 limit.
- Trump Account money must be held in a fund tracking a US equity index, with annual fund expenses capped at 0.10%.
- A 529 plan grows tax-free for qualified education costs. Unused money can move to the beneficiary's Roth IRA, up to $35,000 lifetime, if the 529 has been open 15 years.
- Federal aid formulas count student-owned assets at 20% and parent-owned assets at up to 5.64%, so a custodial account usually hurts aid more than a parent-owned 529.

## Which account should you use to invest for a child?

Match the account to the goal. Money for tuition fits a 529, money for the child's long-term future fits a Trump Account, and money with no fixed purpose fits a parent-owned brokerage account. A custodial account fits only when you are sure you want the child to own the money outright.

The four containers differ on three things: who pays tax on growth, who legally owns the money, and how financial aid formulas count it. Time in the market matters more than which container you pick, but the container decides what happens if plans change.

## What is a Trump Account?

A Trump Account is a type of traditional individual retirement account (IRA) for a child, created by the One Big Beautiful Bill Act, signed July 4, 2025. A child must be under 18 by the end of the year the election is made, and must have a Social Security number.

Key rules:

- **Seed money:** a pilot program pays a one-time $1,000 federal contribution for US citizen children born January 1, 2025 through December 31, 2028. Parents claim it with IRS Form 4547.
- **Contributions:** family, friends, employers and others can contribute starting July 4, 2026, up to $5,000 a year combined. The $1,000 seed does not count toward that limit.
- **Investments:** the money must be held in a mutual fund or ETF that tracks an index of primarily US companies, such as the S&P 500, with total annual fees of 0.10% or less.
- **Access:** money generally cannot be withdrawn before the child turns 18. After that, traditional IRA rules apply, including income tax on withdrawals and possible penalties for early withdrawals.

Regulations are still being finalized, so check the IRS Trump Accounts page before filing.

## How does a 529 plan work?

A 529 is a state-run education savings account. You contribute after-tax money, it grows tax-free, and withdrawals are tax-free when spent on qualified education expenses.

If you withdraw for something else, the earnings portion is taxed as income and usually carries a 10% penalty. The contributions themselves come back without tax.

Since January 1, 2024, unused 529 money can be rolled into a Roth IRA for the beneficiary. The limits are strict:

- The 529 must have been open at least 15 years.
- The lifetime cap is $35,000.
- Money contributed in the last five years (and its earnings) cannot be rolled.
- Each year's rollover is capped at that year's IRA contribution limit, and the beneficiary needs earned income at least equal to the amount rolled.

## What is a custodial (UGMA/UTMA) account?

A custodial account is a brokerage account an adult manages for a minor under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA). The gift is irrevocable: the assets belong to the child from day one.

The child takes full control at the age of majority, which is 18 in some states and 21 in others. After that, the child can spend the money on anything.

Income inside the account is the child's unearned income and can fall under the kiddie tax. In recent years the first $1,350 has been covered by the standard deduction, the next $1,350 taxed at the child's rate, and anything above $2,700 taxed at the parents' rate. The IRS adjusts these figures, so confirm the current-year amounts on Form 8615 instructions.

## How do the four options compare?

| | Trump Account | 529 plan | Custodial UGMA/UTMA | Parent brokerage |
|---|---|---|---|---|
| Legal owner | Child (adult manages) | Account owner, usually a parent | Child | Parent |
| Tax on growth | Deferred, then traditional IRA rules | Tax-free for qualified education | Kiddie tax above the threshold | Parent's tax rates |
| Yearly limit | $5,000 combined (seed excluded) | No federal limit; gift tax rules apply | No limit; gift tax rules apply | None |
| Investments | US equity index fund, 0.10% or less | Plan menu | Whatever the broker offers | Whatever the broker offers |
| Access before 18 | Generally blocked | Anytime, with tax and penalty on non-qualified earnings | Custodian can spend for the child's benefit | Unrestricted |
| Aid treatment | Retirement-style account | Parent asset if parent-owned | Student asset | Parent asset |

## How do these accounts affect financial aid?

Student-owned assets count more heavily than parent-owned assets. In the federal Student Aid Index formula, student assets are assessed at 20%, while parent assets are assessed at up to 5.64%.

That means a custodial account is the most costly for aid. A parent-owned 529 is treated as a parent asset. Under current FAFSA rules, a 529 owned by a grandparent is not reported as an asset on the FAFSA.

Example: $10,000 in a custodial account could add up to $2,000 (20%) to the child's Student Aid Index. The same $10,000 in a parent-owned account adds at most $564 (5.64%). A lower index generally means more need-based aid.

Many private colleges use their own formulas, so aid treatment can differ there.

## How to choose in practice

1. **Claim the seed if the child qualifies.** The $1,000 pilot contribution is the only free money in this comparison.
2. **Fund your own retirement first.** A student can borrow for school, but nobody lends for retirement.
3. **Match the container to the goal.** Tuition money belongs in a 529. Money that might fund a car, a first apartment or an emergency belongs somewhere without withdrawal penalties.
4. **Decide on custodial accounts deliberately.** The child gets full control at the age of majority, and the gift cannot be undone.
5. **Compare fees.** 529 plan menus vary widely by state, and your home state's plan is not automatically the cheapest. Small fee gaps compound over 18 years, as the [advisor fee guide](/learn/portfolio-management/financial-advisor-fees-vs-diy-investing/) shows for a 1% fee.
6. **Use more than one.** A 529 for education and a brokerage account for everything else can work side by side.

## Where do these rules fall short?

The rules change, and the container is not the whole story.

- **Trump Account rules are still maturing.** Regulations and administrative details can change, so confirm current rules before opening one or sending money.
- **Locked money is a cost as well as a feature.** If the family might need the money before 18, a Trump Account is the wrong place for it.
- **A 529 can be overfunded.** The Roth rollover helps, but it is capped at $35,000, needs 15 years, and depends on the child's earned income.
- **Custodial accounts are not a way to avoid tax.** Above the kiddie tax threshold, the income is taxed at the parents' rate.
- **Starting early beats optimizing.** Contributions made when a child is two have 16 years to compound before 18. Delaying to find the perfect account usually costs more than choosing a slightly imperfect one. See [dollar-cost averaging](/learn/portfolio-management/dollar-cost-averaging/) for a steady way to contribute.

## Example: one child, two goals

A child is born in March 2026 and qualifies for the $1,000 seed. The parents want to help with education but do not know if the child will attend a four-year college.

- **Trump Account:** the parents file Form 4547 to claim the $1,000 seed, which sits in a low-cost US equity index fund until the child turns 18.
- **Parent-owned 529:** the education money goes here. If college happens, tuition withdrawals are tax-free. If not, the parents can change the beneficiary to another family member or, after 15 years, roll up to $35,000 into the child's Roth IRA over time.
- **No custodial account:** the parents want to keep control of where the money goes, and a UTMA would hand it over at the age of majority and count at the 20% student rate for aid.

## What this means for you

If you have a regular job and a brokerage account, a few habits cover most of this:

- Check whether your child is eligible for the $1,000 seed and note the Form 4547 filing step in your tax calendar.
- Confirm your own retirement contributions and emergency fund are on track before funding a child's account.
- Write down what the money is for. Tuition, general long-term savings and flexible money point to different containers.
- Look up the total fee on any fund or 529 plan before opening it.
- Set up automatic monthly contributions you can keep up in a bad year.
- If the child later wants to look at individual companies, a [free Cluenex stock page](https://cluenex.com/stocks/) shows business quality and insider activity in plain English. Keep the core of the money in a low-cost index fund, as covered in [index funds vs picking your own stocks](/learn/portfolio-management/index-funds-vs-stock-picking/).

## Questions people ask

### How do I claim the $1,000 Trump Account pilot contribution?

File IRS Form 4547, Trump Account Election(s), with your tax return. The child must be a US citizen with a Social Security number and born between January 1, 2025 and December 31, 2028.

### Can I use a 529 and a Trump Account for the same child?

Yes. The accounts have separate rules and limits. Many families use a 529 for education money and a Trump Account for the seed and long-term savings.

### What happens to a Trump Account at 18?

Withdrawals are generally blocked before 18. After that, traditional IRA rules apply, so withdrawals are taxed as income and early-withdrawal penalties may apply. The balance can also be rolled into another eligible retirement account.

### Does a custodial account really become the child's at 18?

Yes. Control passes at the age of majority under the governing state's law, which is 18 in some states and 21 in others. Some states allow a later age if set when the account is opened.

### Which account hurts financial aid the least?

A parent-owned 529 and a parent brokerage account are assessed at up to 5.64% in the federal formula, while student-owned accounts such as UTMAs are assessed at 20%. A grandparent-owned 529 is not reported on the FAFSA under current rules.

### What is the kiddie tax?

The kiddie tax taxes a child's unearned income above a threshold at the parents' rate. In recent years the first $1,350 is covered by the standard deduction and the next $1,350 is taxed at the child's rate. The IRS adjusts these amounts, so check the current figures.

## Sources

- [IRS Form 4547, Trump Account Election(s)](https://www.irs.gov/forms-pubs/about-form-4547)
- [H.R. 1, One Big Beautiful Bill Act (119th Congress)](https://www.congress.gov/bill/119th-congress/house-bill/1)
- [Publication 970, Tax Benefits for Education](https://www.irs.gov/publications/p970)
- [Topic no. 553, Tax on a child's investment and other unearned income (kiddie tax)](https://www.irs.gov/taxtopics/tc553)

Cite as: Cluenex. "Investing for Your Kids: Trump Account, 529 or Custodial?." Cluenex Learn, updated Oct 15, 2026. https://cluenex.com/learn/portfolio-management/investing-for-your-kids/