Last week the S&P was up just a bit, but this week earnings season kicks off with most major banks reporting their quarterly earnings. We’ll also see the Consumer Price Index, a common measure of inflation, and the Producer Price Index, which tracks wholesale and manufacturing inflation. In addition, the consumer sentiment report will be released on Friday. If you’re paying attention to all of this data, it’s critical to keep in mind that investing is a long-term thing.
If you have a child, there’s a new opportunity for investing. The One Big Beautiful Bill Act created Trump Accounts as a way for parents to save for their children. These accounts can be opened for anyone under 18. Families and friends can contribute a maximum of $5,000 a year. For children born in 2026, 2027, or 2028, the US Government will put in $1,000. All of this sounds great. But there are a few reasons it’s not everything it’s cracked up to be.
First, the account becomes the property of the child at 18. You lose all control the day they become a legal adult. Second, the account essentially transitions to an Individual Retirement Account. Funds can be withdrawn penalty-free for education or a first-time home purchase, and some medical bills. Those withdrawals are still subject to ordinary income tax. If you are taking money out for education, it is considered income of the student, and reduces potential need-based financial aid.
Finally, if you take out money for any other reason prior to 59 1/2, you will pay ordinary income taxes and a 10% penalty.
While receiving $1,000 in taxpayer money is great, there is no reason to add more money to the account. There are three better options.
First, a 529 College Savings Account. On a federal level, you contribute money after-tax, and the investments grow tax-free. If used for education, including K-12, college, or vocational school, withdrawals are tax free. Some states, like Maryland, also offer a state tax deduction for contributions or even matching funds.
Second, a Uniform Trust for Minor’s Act, or UTMA, account. These are accounts opened by an adult for the benefit of a child. There are tax advantages; talk with your advisor if you have one to be certain they are harvesting the maximum gains every year. The account becomes the property of the child when they turn 21 and can be used for any purpose.
Third, once your child has earned income, which can include money from babysitting or mowing lawns, they can open a Roth IRA. You can contribute the lower of $7500 or what they earned that year. You can take out contributions at any time with no tax or penalty. Any amount of gains can be withdrawn tax- and penalty-free for higher education. And up to $10,000 in gains can be withdrawn for a first-time home purchase.
I think there is a place for the Trump accounts. Employers can also contribute to accounts for their employees’ children. And philanthropists can contribute to all accounts in a specific area. It could be a great way for a charity to help children in a low-income school, for example. For families with the means to contribute, the other three accounts are usually going to be a better option.
Your action item this week is to hydrate. Grab a refillable bottle and focus on drinking water this week, not spending money on sodas, sports drinks, alcohol, or juice. Your wallet and your waistline will thank you.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.