Tax Law Changes - For Investors

Hi, and welcome back to the Insights page. I hope that you are having a good day.

The "One Big Beautiful Bill Act" of 2025 made some changes to the way that people can invest, mostly for parents. The new "Trump accounts" and expanded 529 utilization are the two significant parts of the OBBBA for investing that are discussed below.

Many people have heard of 529s, where a parent can save for a child's education, and have the earnings on the parent's contributions be tax free. What does that actually mean though, in practice?

Well, investments that are deemed to be "capital" in nature according to the United States tax code are taxable if they increase in value and/or provide value to the investment holder in the form of capital gains tax. For individual taxpayers, capital gains tax uses a different rate structure than regular, labor and business tax. The capital gain rate structure is often preferential, in that the tax rate on capital gains is often less than the tax rate would be on additional "ordinary" income.

What this means for 529s is that if they increase in value over time, the increase in value that would typically be subject to capital gains taxation are subject to no taxation at all. The issue with 529 plans is that the investment is limited in its tax benefit, in that the proceeds from the 529 are only tax free if they are used for qualified educational purposes.

Specific discussion about the new "Trump Accounts" and also 529 plan changes are provided below:

Trump Accounts

Trump Accounts (TA) are accounts for children that can be opened by their parents, legal guardian, and the Tresury Department itself if a child is reported as a dependent on another's tax return. Trump accounts can be opened for anyone under the age of 18. TA work kind of like 529 accounts, in that any appreciation of value of the investments in the TA are tax free upon distribution. Distributions can be made from a TA to the individual when that individual turns 18 years old.

TAs will be able to be opened one year after the OBBBA passed, so in the summer of 2026. Up to $ 5,000 will be able to be contributed to a TA annually. TA funds, upon withdrawal after the age of 18, can be used for any purpose. The use of amounts contributed before the age of 18 of the account holder and appreciation on those contributions are not restricted in use like 529 plans.

There are two time based layers to TAs. All contributions made before the age of 18 can be withdrawn, with the associated earnings, after the age of 18. After the age of 18, the account remains open, but then changes to acting like an IRA. This means that contributions made to the account after the age of 18 will be subject to IRA rules, and thus are generally not accessible until age 65 (at least not without a financial penalty).

There are some perks to TAs as provided in the OBBBA. These incentives are in place, in part, to encourage people to open and contribute to TAs. For children born between 2025 and 2028, they will have a TA opened for them by the U.S. Treasury, and $1,000 will be deposited in it by the U.S. Treasury. Employers can direct up to $ 2,500 of an employee's compensation to a TA, and if they do so, the amount contributed to a TA will be tax free to the parent or guardian.

For parents, that means that if you were going to contribute to a TA anyway in the year, it might be a good idea to ask your employer to direct some of your pay to a TA so that your tax bill will be lower. This is in effect a double tax benefit system, one to the parent, and another to the child who benefits from the TA.

TAs must be invested in a mutual fund or ETF that is approved. Approved ETFs/mutual finds are generally intended to be stock market index funds.

In addition, state and local governments will be able to contribute to TAs, subject to those contributions meeting certain requirements included in the OBBBA.

So the quesiton about TAs is, why are they introduced? Some reasons probably include:

1. To teach children about investing, financial planning, and responsibility.

2. To encourage people to save for retirement upon reaching the age of 18.

   1. For example, a typical saver with investment earnings that was not taxed might consider that wow, it is great making money tax free. If I start saving for retirement now, early, when I'm 18, then I will have a lot of money when I'm 65.

   2. This person will also be better off at that time, considering the fact that Social Security benefits will be reduced by the time such people as in this example reach the age of 65.

      
      

529 Plan Changes

The uses of funds from 529 plans was expanded as a result of the OBBBA. More expenses at the K-12 level can now be paid for using 529 funds.

Yes, you heard that right. Costs at the K-12 level can be paid for with 529 funds. So if you are planning of sending your child to a private and/or religious K-12 school, this means you!

So instead of 529 plans just covering K-12 tuition, other costs can now be paid for with 529 funds, including materials, books, tutoring fees, ACT and SAT test fees, dual enrollment fees for college courses taken in high school, and specialized fees for students with disabilities.

In addition, the annual withdrawal limit for K-12 expenses has been increased from $10,000 to $20,000.

On a post-secondary school level, the use of 529 funds has been expanded to generally include books and materials.

HSA expanded use

In addition to the changes noted above to 529 plans and the new Trump accounts, some changes were made to how HSAs are used.

HSAs are the most tax effective way to save for qualified medical expenses that may be needed after the age of 65.

Certain people with direct primary care plans can now contribute to an HSA if their monthly fees are less than $ 150 for an individual or $ 300 for a married couple. In addition, those with bronze or catastrophic medical plans from the health insurance marketplace can now participate in HSAs, as those plans are now deemed high-deductible insurance plans.

Whew, another whole of of tax talk right? As I have noted, taxes are complex. Cloud Financial Solutions is well prepared and able to help with the tax work needed for you and/or your business. Reach out to us today for a free consultation!