Warning: 18 Years of Maxing Out a Trump Account Could Leave Half of That Money Taxable
Financial planners are quietly steering families away from the Trump account's most obvious move, and the math behind their caution changes the case for funding it entirely.
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The Trump account is being sold to parents as a simple way to give a child a running start: open it, fund it, walk away for 18 years. On ChooseFI episode 616, financial planner Sean Malaney pushed back. His argument: if you max the account for nearly two decades, most of what your child receives will be growth rather than the money you put in, and growth is taxable at withdrawal.
On the same episode, co-guest Cody Garrett ran an illustration showing that after 18 years of $5,000 annual contributions, roughly half of the ending balance would be taxable. Host Brad Barrett said he is holding off on funding one for his own kids. All three framed the problem the same way: maxing it out for 18 years is a poor default for most families.
Why a Small Basis Turns Into a Big Tax Bill
Basis is the money you actually contributed, the after-tax dollars the IRS has already seen. Everything on top is growth, and growth is generally taxable when it leaves a non-retirement account. In a long-horizon account, basis becomes the smallest part of the pile by the end.
Malaney said: “If you just maxed out the Trump account, so you do 17 years or 18 years of $5,000 contributions, you’re probably going to have basis that’s pretty small proportionally with the growth.”
Garrett’s illustration on the same episode made the ratio concrete. Using $5,000 per year over 18 years, Garrett estimated roughly half of the ending balance would be taxable. A long funding run turns a modest annual contribution into a balance that is mostly gain.
Compare a Roth, where qualified withdrawals of growth are tax-free, with a 529 used for school, where growth also escapes tax. In those wrappers, a small basis is a feature. In the Trump account, a small basis is the source of the tax bill.
Two Narrow Cases Where Malaney Will Still Fund It
Malaney named two use cases. The first is a child with real earned income but no tax liability. The account can house wages the child already owes no tax on, and the family gets contribution room it could not otherwise access.
The second is what he called a “backdoor Roth for the kid” strategy, where the account serves as a stepping stone to a Roth structure that the child controls later. That path assumes rules stay friendly to conversion, which nobody can promise right now.
Outside those, Malaney’s recommendation was to stay conservative. His reason: “We just don’t know what this all looks like.” The account’s tax treatment, withdrawal timing, and interaction with other vehicles have not settled into a shape a parent should bet 17 or 18 years on.
If your child has no earned income and no clear conversion plan is in place, you sit outside both cases. Funding it anyway is committing 18 years to a weak reason.
Where 529s, UTMAs, and Inheritance Actually Fit
A 529 plan is the cleanest tool for education. Growth comes out tax-free when used for qualified expenses, and unused balances now have a limited path into a Roth IRA for the beneficiary. If the child skips college and the Roth rollover cap is exhausted, nonqualified withdrawals are subject to income tax plus a penalty on the earnings.
A UTMA is the opposite tradeoff. It is flexible, holds any asset, and the child takes full legal control at the age of majority in your state.
Inheriting appreciated assets at your death carries an underused advantage: a step-up in cost basis. The heir’s basis resets to market value on the date of death, and the embedded gain built over decades is wiped for income tax purposes. Malaney said this route deserves a seat at the table alongside anything you do while alive.
What a Parent Should Actually Do This Year
Following Malaney’s guidance, do not automate 18 years of $5,000 contributions today. The rules are unsettled, and the two situations that justify funding are narrow.
If your child has earned income and no tax liability, fund the account up to the amount that income supports, and revisit it annually. If you have a specific Roth conversion plan, size the contribution to that plan rather than to the annual cap.
However, if neither describes your family, put the same dollars where the rules are readable today. Use a 529 for education, a UTMA if you accept the control handoff at majority, or titled assets in your own name if you expect the basis step-up to do the work.
Confirm current Trump account guidance in writing before you fund anything. Barrett’s stance is the right one for most families right now: hold off on the 18-year commitment.
Contact [email protected] for any questions or corrections.
Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth and cyclical stocks that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as cryptocurrencies and penny stocks.
