Trump accounts vs. 529s, UTMA/UGMAs, and Roth IRAs: Which to pick to save for kids
If your top goal is general savings or a future first home for the young adult
1. Start by opening a Trump Account and claiming seed money, if your child is eligible.
If your child qualifies for the $1,000 seed, it will be placed into a low-fee mutual fund or ETF that seeks to track the stock market, giving the account the potential for long-term growth.
Because Trump Accounts are designed for retirement, this step can be a long-term complement to accounts that may be better suited for general savings goals for children.
2. If available, contribute to the Trump Account via your workplace plan.
Some employers may provide a direct contribution up to $2,500 per year per employee on behalf of the employee’s dependent. If you have multiple children, the employer may split the contribution among them. For example, if you have 2 children, it could be split $1,250 per child. These pre-tax contributions are not treated as income to the parent, and the amount is determined by the employer.
Employees can elect to redirect part of their pay pre-tax into a child’s Trump Account through their employer’s benefits plan. If your employer allows contributions to a Trump Account through a Section 125 cafeteria plan, aim to contribute the full amount—up to $2,500 per year per employee. Combined pre-tax employer and employee contributions cannot exceed $2,500 per employee per year.
Both types of contributions, employer and employee, count toward the annual contribution limit for Trump Accounts, which is $5,000 per child. Withdrawals, which will generally only be allowed after age 18, will be taxable because the contributions were made pre-tax.
Not all employers will offer these features; if yours doesn’t, move to the next step.
3. Use an UGMA/UTMA to save for broad goals.
UGMA/UTMA accounts can help build savings for life’s early milestones—cars, rent deposits, travel, or even a first home. Earnings may be subject to the kiddie tax each year, and withdrawals of earnings during the college years would be taxed at the parent’s rate, including withdrawals of capital gains. Withdrawals made after college are taxed at the child’s presumably lower rate.
Alternatively, a child-owned brokerage account like the Youth® Account.
For children aged 13 through 17, the Fidelity Youth Account is a brokerage account owned by the child. It is not a custodial account, but a parent or guardian must open the account for the teen. Taxes on any earnings do follow the same treatment as applied to UGMAs/UTMAs.
4. Add a Roth IRA for minors when earned income begins.
Once your child has earned income, a Roth IRA becomes a powerful, flexible long-term tool. Contributions can be withdrawn tax- and penalty-free at any time, and any earnings can be used tax- and penalty-free (up to $10,000) for a first-time home purchase once the account has been open at least 5 years. This makes the Roth especially valuable for young adults building toward a first home.
