Having a child is a unique combination of exhausting, exhilarating, rewarding and terrifying.
It may be the last thing on your mind during the early days of parenthood, but chances are there will come a day when your child no longer lives under your roof.
And it’s never too early to start planning for it—even if you are still walking around in a hazy fog of sleep deprivation.
The cost of living has been on a steady march upward in recent years, making it difficult for some young adults to achieve financial independence.
Today’s young adults (ages 18-34) are more likely to live with their parents than those in the early 1990s, and 44% say they’ve received financial help from their parents in the last year, according to the Pew Research Center.
If you have the resources and want to establish a strong financial foundation for your child, there are multiple ways you can do so.
One of the simplest and most flexible options is to open a non-custodial brokerage account. There’s no bells and whistles here; this is just a standard brokerage account owned by the parent, perhaps mentally earmarked for future gifting or support.
Or you can take advantage of child-specific accounts which offer unique tax benefits and efficient saving for future goals.
We’ll explore four options in more detail, including 529 college savings plans, Coverdell education savings accounts, custodial Roth IRAs, and UTMAs/UGMAs to help you decide which type of account (if any) is right for your child.
Education Savings Accounts
529 College Savings Plans
529 accounts are tax-advantaged state-sponsored education savings plans that allow you to set aside money for your child’s post-secondary education. The earlier you begin saving the better, since the funds will have more years to grow. A contribution set aside for a newborn and earning a 7% return would nearly quadruple in value over a 20-year time horizon.
Parents can use dollars in a 529 to pay for qualified education expenses, including tuition, room and board, books, fees and more.
529 plans are generally a low-cost way to save for your child’s education, but investment options and fees vary by plan. While many states offer attractive 529 portfolios with expense ratios of 0.20% or less, some plans have significantly higher costs.
You can participate in any state’s plan—and in some cases you may find that a different plan better suits your needs.
However, it’s best to check out your state’s plan first because you’ll typically get the most tax benefit by participating in it.
Pros:
- K-12 tuition option: You don’t have to wait until your kids graduate from high school to tap into their 529. You can use up to $10,000 a year to pay for private K-12 tuition, but you can’t use it for other primary and secondary education expenses.
- Unlimited beneficiary changes: If you don’t need all the funds in your child’s 529 plan, you can change the account beneficiary to a qualifying family member, which includes extended family. There are no limits on when or how often you can change beneficiaries of a 529.
- Tax benefits: In many states, 529 plans are triple tax-advantaged. Contributions are tax deductible (up to the limit), grow tax-free, and distributions aren’t taxed when used to pay for 529-qualified expenses. In most states, only contributions to in-state plans are deductible. However, nine states, including AR, AZ, KS, ME, MN, MO, MT, OH and PA allow you to deduct contributions you make to any 529 plan. If your state doesn’t offer a tax credit for contributions, it’s often still worth funding a 529 to receive tax-free growth and distributions. A financial advisor can help you decide which plan may best suit your needs.
Cons:
- Investment options: Investment options are limited to the funds in the plan you choose, and some states have a more comprehensive or lower fee suite of options than others.
- Penalty on non-education withdrawals: Generally, it is better to over save than under save. But with 529s, it is best to avoid significantly overfunding your child’s account. For any non-qualified withdrawals, the portion attributable to earnings is hit with a 10% penalty plus ordinary income tax.
- Limited rollover of funds: If you overfund a 529, you can transfer the excess funds into a Roth IRA in certain circumstances. However, you are subject to the annual Roth IRA limits, plus a $35,000 lifetime limit. Otherwise, assets in a 529 can only be rolled penalty-free to other 529s.
Additional Considerations:
- Asset allocation: You have a shorter runway to save for college than you do to save for retirement, and the risk profile of the account should reflect that. Consider an age-based portfolio that automatically adjusts the risk as college approaches.
Coverdell Education Savings Accounts (ESA)
Coverdell ESAs are similar to 529s in that they allow you to save for your child’s education, but they have much lower contribution limits, an income cap for eligibility, and the beneficiary of the account must be under 18 in the year you make the contribution.
Think of a Coverdell ESA as a Roth IRA for qualified education expenses. There are income restrictions on who can contribute and lower annual limits. But if you qualify, while you won’t receive an income tax deduction on your contributions, you will enjoy tax-free growth and distributions.
Unlike a Roth IRA, these are not lifetime accounts. The account must be distributed (or transferred to another beneficiary) by the time the beneficiary reaches age 30. Otherwise, the earnings will become taxable to the beneficiary, and they are also assessed a 10% penalty.
Due to the restrictions, Coverdell ESAs are less common than 529 plans. However, for a family under the limits, there are certainly use cases such as the ability to use tax-advantaged funds to pay for known annual education costs like uniforms or special needs services.
Pros:
- Investment options: Coverdell ESAs are self-directed accounts. Unlike a 529, you’re not limited to the funds in the plan—you can invest in whatever you want, including mutual funds, ETFs, real estate, art and more.
- Broad use for K-12 expenses: Funds from a Coverdell account can be used to pay for any K-12 qualified education expense, including supplies, uniforms, tutoring services and more—not just tuition.
- Tax Benefits: Benefit from tax-free growth and tax-free distributions, just like in a 529 plan. No state tax deductions, however.
Cons:
- Contribution limits: You can only contribute up to $2,000 per year per beneficiary into a Coverdell account.
- Income limits: To make the full $2,000 contribution, your income must be below $95,000 per year if you file your taxes individually and $190,000 if you file jointly. Individual filers with incomes from $95,000 to $110,000, and joint filers with incomes from $190,000 to $220,000 may contribute a reduced amount. High earners with an individual income above $110,000 or a joint income above $220,000 aren’t eligible to contribute to a Coverdell ESA.
- Possible age penalty: Don’t neglect these accounts. If a beneficiary turns 30 without assets being fully withdrawn (or transferred out), the beneficiary – not the parent – faces a tax penalty.
Additional Considerations:
- Funding capacity: Contribution limits for a Coverdell are much lower than the contribution limits for a 529 plan. If you want to save larger sums to help fund your child’s education without worrying about multiple accounts, a 529 is a better option.
Traditional Investment Accounts
Custodial Roth IRAs for Kids
A custodial Roth IRA operates like a normal Roth IRA but is opened in a minor’s name and controlled by a custodian (usually a parent) until the child turns 18.
Custodial Roth IRAs are funded with after-tax dollars, and the assets in the account are never taxed again.
Parents can fund their child’s Roth IRA only if the child has earned income for that year (W-2 wages or 1099 self-employment income). This must be income reported on a tax return; the “under the table” cash your teenager earns babysitting or mowing lawns cannot be used to justify a Roth IRA contribution.
Custodial Roth IRAs can be funded up to the amount of the child’s earned income or the IRS limit ($7,000 in 2025), whichever is less.
Suppose your son earns $4,500 of reportable income working as a camp counselor over the summer. You can contribute up to $4,500 to a Roth IRA in your son’s name for that tax year. A great way to reward the work ethic!
Now say your daughter earns $10,000 lifeguarding at the rec center. You are capped at making a $7,000 contribution to her account.
Note that the annual Roth IRA limits apply per person. If your precocious child investor has already contributed $7,000 of their earnings into their custodial Roth IRA, you are not able to make any additional contributions to their account.
Pros:
- Head start for retirement: By taking advantage of compound interest, you can give your kids a jumpstart on saving for retirement when you open a custodial Roth IRA in their name. Using a 7% growth rate, a Roth IRA contribution that won’t be touched for 40 years would grow to be nearly 16 times greater!
- Withdrawal of contributions: While earnings can’t be withdrawn without penalty until age 59½, the principal contributions can be withdrawn without penalty after 5 years.
Cons:
- Low contribution limits: Contribution limits are low, and don’t allow you to save as much for your child as a taxable brokerage account would.
- Early withdrawal penalties: If your child needs access to the money in the account before they reach age 59½, they must pay a 10% penalty to withdraw any earnings—with a few exceptions. One notable exception is the option to withdraw up to $10,000 in earnings toward a first home, although they would still have to pay income tax on those.
Additional Considerations:
- Your goals: Withdrawals are restricted until age 59.5. Contributions may result in a substantial sum by the time your child retires, but other investment options will better allow you to provide your child a pool of assets they can use throughout their adult life. Consider if a Roth IRA is best suited to meet the goals you have for your child.
Custodial Accounts (UGMA/UTMA)
Regulated by the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA), UGMAs and UTMAs are investment accounts you can establish in your child’s name. These operate similarly to a brokerage account with distribution requirements like that of a trust.
You retain control and pay any necessary taxes for the account while your child is a minor. When your child reaches the age of majority—usually 18 or 21, depending on the state—the account must transfer to them, giving your child full control of the assets.
You can save a substantial amount in these accounts if you choose, and you can do so with some degree of tax benefit (see Kiddie Tax below) compared to a regular brokerage account. It also provides your child a nest egg that can be used for any purpose beginning in young adulthood.
It is important to consider if an unrestricted lump sum at age 18 or age 21 is what you intend for your child.
Unlike with a Roth IRA, where the early withdrawal penalty provides some incentive not to liquidate the account, the UTMA/UGMA becomes a taxable brokerage account that the child is free to manage as they please.
While a UTMA/UGMA provides a good opportunity for an investment education, as we know: the kids don’t always listen.
Pros:
- Investment options: UGMA/UTMA accounts are self-directed. There are no limitations on the assets you can invest in.
- Flexibility: Funds in the account can be used for anything as early as the child’s age of majority, allowing for more flexibility than an education-only account.
- No contribution limits: UGMAs/UTMAs have no contribution limits allowing you to save large sums for your child’s future. In 2025, you can give $19,000 per person per beneficiary without filing a gift tax return. Thus, a married couple can do $38,000 per beneficiary.
Cons:
- Kiddie Tax: The interest and dividends generated in an UGMA/UTMA account are taxable. That said, the Kiddie Tax structure does allow for less tax drag than compared to a regular brokerage account.
- First, $1,350 of unearned income is the standard deduction (in 2025). For a child with earned income from a job, the deduction amount is earned income + $450.
- Next $1,350 of unearned income is taxed at the child’s rate. This will be a 10% tax rate unless the child has substantial earned income on their own.
- Additional unearned income is taxed at the parent’s rate (except in the rare case where a child has a higher tax rate than his or her parent).
- Financial aid: Because the account is the child’s asset, up to 20% of the account value is included in the Free Application for Federal Student Aid (FAFSA) calculation. By comparison, parent assets such as a 529 are considered at a much lower 5.64% rate.
Additional Considerations:
- Account transfer: Gaining control of significant assets as a young adult can pose challenges if your child isn’t prepared to handle the financial responsibility. If you’re concerned about your child’s ability to responsibly manage the account’s assets, you may consider saving in your own account and then gifting the assets to your child when you believe they’re mature enough, minimizing the risk that they will squander a substantial sum of money.
Next Steps:
If you're at a phase in your life when you're not just investing for yourself but for your children's futures, it might be a sign that you can benefit from a comprehensive wealth management with an investment strategy that aligns with your financial goals.
Our free, two-minute financial analysis is a great place to start to assess where your financial plan has room to grow and where additional opportunities may exist.
