With the introduction of new “Trump Accounts” under recent legislation, many families are asking how they compare to more traditional ways of saving for children like custodial investment accounts (often called UTMA or UGMA accounts).
While both options can play a role, in many cases taxable custodial accounts offer more flexibility and potential tax advantages. Here’s what to know.
What Are These Accounts?
Custodial (UTMA/UGMA) Accounts
- Investment accounts opened in a child’s name, managed by a parent or guardian
- Can be used for a wide range of expenses that benefit the child
- No contribution limits (within annual gift rules)
“Trump Accounts”
- A newer type of child savings account created by recent legislation
- Designed more like a retirement-style account
- Contributions are limited and investments are more restricted
- Funds are generally locked until the child reaches adulthood
Key Differences That Matter
1. More Flexibility With Custodial Accounts
Custodial accounts can be used for almost anything that benefits the child education, a first car, or other early-life expenses.
“Trump Accounts,” on the other hand, are more restrictive. Funds are typically not accessible until adulthood, which can limit their usefulness for shorter-term goals.
2. Potentially Lower Taxes Over Time
Custodial accounts are taxed at capital gains rates, which are often lower and in some cases even 0% for children with little income.
By contrast, withdrawals from “Trump Accounts” are generally taxed as ordinary income, which can be higher.
3. Greater Control Over Investment Choices
Custodial accounts allow for a wide range of investments, including individual stocks, ETFs, and other strategies.
“Trump Accounts” are typically limited to simpler, index-based investments.
4. Easier to Align With Real-Life Needs
Because custodial accounts are not tied to retirement rules, they can be used more strategically as a child grows whether for education, opportunities, or unexpected needs. “Trump Accounts” are designed more for long-term savings, which may not match every family’s priorities.
When “Trump Accounts” Might Still Make Sense
To be fair, these newer accounts do offer some benefits:
- Potential government contributions or incentives
- Tax-deferred growth
- A simple, structured way to save long-term
For some families, they may be a useful supplement, especially if there are incentives available
The Bottom Line
For many families, custodial accounts provide greater flexibility, broader investment options, and potentially lower taxes making them a strong foundation for saving on behalf of children.
That said, the right approach depends on your goals. In some cases, a combination of both account types may make sense.
- If you’d like help deciding which approach fits your family’s plan, we’re happy to walk through the options with you.