Federal employees planning for their children’s future face a growing number of savings options—and a growing risk of unintended consequences. While many FERS households rely on 529 college savings plans, others consider custodial accounts such as UTMA or UGMA, or newer policy proposals sometimes referred to as “Trump accounts.”
These choices are not interchangeable. For families already balancing a FERS pension, Thrift Savings Plan (TSP), Social Security, and future Medicare premiums, the structure of a child’s savings account can have long-lasting effects well beyond college tuition.
What is Important for FERS Families
Most federal households share three defining traits: predictable retirement income, significant tax-deferred savings, and exposure to future tax thresholds such as IRMAA and survivor tax compression. Because much of a federal retiree’s income is fixed by formula, mistakes made early in savings decisions are harder to correct later.
The key planning questions are not just how much you save, but who owns the account, who controls it, and when income appears on a tax return.
529 Plans
A 529 plan is owned by a parent or grandparent, with the child named as beneficiary. Contributions grow tax-free when used for qualified education expenses, and recent law changes allow unused funds to be rolled into a beneficiary’s Roth IRA, within limits.
For FERS families, this structure aligns well with long-term planning. The parent retains control, the account receives favorable financial-aid treatment, and distributions do not unexpectedly inflate a student’s taxable income during college years. While funds are education-focused, that definition now includes K-12 tuition, apprenticeships, and student loan repayment.
UGMA and UTMA Accounts
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts allow parents to transfer assets to a minor while serving as custodian. The difference between them is scope: UGMA accounts generally hold cash and marketable securities, while UTMA accounts can hold assets such as real estate, private business interests, or collectibles.
The critical issue for both is ownership. These assets legally belong to the child and must be turned over at the termination age—typically 18 or 21, and up to 25 in some states for UTMA accounts.
Once that age is reached, the child gains full, unrestricted control. There are no education requirements, no spending limitations, and no ability for parents to reverse the decision.
A FERS Family Case
Consider a GS-13 federal employee, age 45, earning $115,000, with an expected FERS pension of $42,000 plus Social Security. The employee contributes steadily to the TSP and saves for a child by contributing $5,000 annually from birth through age 18.
By the child’s first year of college, the account has grown to approximately $140,000.
If the account is a 529 plan, it is treated as a parent asset for financial-aid purposes. Roughly 5.6% of the balance is assessed annually, and withdrawals for tuition do not increase the student’s taxable income.
If the same savings sit in a UTMA or UGMA account, the full balance is treated as the student’s asset. Up to 20% may be assessed annually, potentially reducing financial-aid eligibility by tens of thousands of dollars. In addition, dividends and capital gains are taxed under the kiddie tax rules, often at the parents’ marginal rate.
At age 21, the account legally transfers to the child—just as the parents approach peak earning years and begin planning around future Medicare premium thresholds.
What About “Trump Accounts”?
So-called “Trump accounts” are not an enacted federal savings program. The term generally refers to policy proposals for government-seeded investment accounts established at birth and invested over time.
As of now, these proposals lack finalized legislation, tax treatment, and clear rules on ownership or access. For FERS families, they remain a policy discussion rather than a planning tool.
At-a-Glance: Child Savings Accounts for FERS Families
| Feature | 529 Plan | UGMA | UTMA | “Trump Account” (Proposed) |
| Account owner | Parent | Child | Child | Unclear |
| Parent control | Yes | Until 18–21 | Until 18–25 | Unknown |
| Tax-free growth | Yes (education) | No | No | Unknown |
| Financial-aid impact | Favorable | Unfavorable | Unfavorable | Unknown |
| Planning certainty | High | High (but risky) | High (but risky) | Very low |
Ownership and control—not just tax benefits—often determine whether child savings strategies help or hurt long-term FERS planning.
Resources
Here are online links you can use to learn more about Trump accounts, 529 plans, and UTMA/UGMA custodial accounts:
529 Plans
- IRS official Q&A on 529 plans – tax-advantaged education savings plans operated by states and educational institutions.
- Vanguard’s 529 plan explanation – basic overview of what a 529 plan is and how it works.
UTMA / UGMA Custodial Accounts
- Saving for College’s comparison of UTMA/UGMA vs. 529 plans – explains the differences and how custodial accounts work.
- Fidelity’s guide to custodial accounts – basic explanation of UGMA and UTMA custodial accounts.
Trump Accounts
- “Trump Accounts: A New Way to Save for Your Child’s Future” – overview of Trump Accounts including seed funding, contribution rules, and comparison with 529 plans. (Saving for College)
- Trump Accounts Website
