If you are like me and are a few months into parenthood, you may be starting to think about how you can best save for your new child’s future, especially as birthday money and other gifts from friends or relatives have piled up. Fortunately, there are several types of savings accounts specifically for those under the “age of majority’ (this is a legal term for people under the age of 18 or 21, depending on the state you live in: UTMA Rules by State 2025) that can help teach them about compound interest and investing early on, help them save for future school and tuition expenses, or combination of both.
Each of these account types has its pros and cons, which I have outlined below. However, you may want to consult with a financial professional on which one or which combination of them may make the most sense given your unique financial situation and goals.
Custodial Bank Checking or Savings
This is probably the simplest option to open and manage for your child. In fact, you can probably open it through your bank or credit union’s mobile app instead of having to physically go to a branch, depending on the size of it. Once you open this account, it functions the same way as every other bank account does for deposits and withdrawals, and you can order a debit card for your child once they get older for spending purposes.
As the parent, you are technically the account owner until they turn 18 to 22, when it then becomes your child’s outright, as the case will be with most custodial accounts. This is not to be confused with a typical joint bank account where your child would technically have full rights to any cash held in the account. The main downside to this account is little to no interest or rate of return, especially with smaller balances.
This can be useful for your child if you start an allowance program for chores at home or if they start working part-time as they get older, so they learn how to handle a bank account. You will also be able to maintain visibility on the account should they ever overdraft the account. The finance charges that usually get charged to low-balance accounts or ones without recurring deposits are usually waived on these until the child turns 22 or 25, but this may vary by the bank.
529 Plan
When it comes to saving for future education expenses, this is probably the most advertised or talked about account for children given the ballooning cost of college tuition the past two decades. Each state will have its own 529 plan through its selected investment custodian, but you can open one at ones where you may already have accounts set up (Fidelity, Vanguard, etc.).
You do not have to be a parent specifically to open a 529 account for your child since grandparents or other relatives can open them as well, sometimes as part of an estate planning strategy. Before opening one for your child, you may want to see if the state you live in and file a tax return for offers a state tax credit or deduction for 529 contributions to its specific plan. Otherwise, contributions are nondeductible. If your state does not offer a similar benefit to that, then you can open the 529 wherever you want so you can compare plans and investment options offered to see the best fit for you.
Your investment options are usually limited to the funds offered by whichever plan you choose, which are typically mutual funds or target date funds based on when your child turns 18. As a side note example, if your child plans to go to college in Utah, you are not tied to having to open a Utah 529 plan for that to happen. 529 plans can be used for tuition expenses for K-12 in addition to college expenses, but the withdrawal limit is $10,000 per year there.
The benefit of contributions to these accounts is that earnings are tax-free while growing, and withdrawals for qualified education expenses are tax and penalty-free. However, taxes and penalties will apply if a withdrawal is made for non-qualified expenses. In the case where your child receives grants or scholarships, the amount equal to those amounts can be withdrawn penalty-free. You can also change the beneficiary of a 529 to other children, yourself, or other relatives should your child not use the entire balance or not pursue higher education instead of withdrawing and paying taxes/penalties.
Under the Secure Act 2.0, you can now start converting unused 529 plan balances to Roth IRA contributions for the beneficiary. The 529 plan must have been opened for a minimum of 15 years, and you can only convert up to $35,000 for any one person, and it is still limited to the annual IRS contribution max of $7,000 per year. The beneficiary must have earned income to be able to contribute as usual. Last I checked, custodians still are not offering this transfer yet since kinks are still being worked out on the logistics of it. You can also withdraw up to $10,000 as a lifetime limit per beneficiary for them to pay down any student loans.
Custodial UTMA/UGMA Brokerage
Similar to the bank accounts mentioned earlier, this is basically an individual brokerage account for those under the age of majority since a child cannot open one of these on their own. This label also applies if you bought individual stock certificates for the benefit of a minor, which I know was common with my parents’ generation, where their parents would buy them Disney stock when they were younger as a gift.
The two different abbreviations listed above stand for Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA). The type you can open will depend on the state you live in, with the main difference being that UTMAs allow for a broad range of assets (including real estate) to be held, while the UGMA is restricted to financial assets. This account operates as a normal brokerage, but you as the parent will be on the account title until they reach the ages 18 to 22. After that point, all funds in the account become the child’s property, and the parent loses control, so education is important to prevent them from potentially squandering it or creating an unnecessary tax bill.
You can purchase any number of individual stocks or mutual funds within it, so it can be a fun way to introduce your child to investing or let them buy a company they are interested in or a fan of, so there is potential for higher gains than there would be in a bank account. Any gains or losses realized or interest and dividends generated will be taxable via 1099 tax forms, so it could be a good way to introduce taxes to them as well.
If the amount of interest and dividends generated (also known as unearned income) is significant, then there may be an issue with something called the “kiddie tax” while they are under age 18 or dependent students from ages 19-24. For 2025, the exemption is $2,700, broken down as follows: the first $1,350 generated is totally exempt, the next $1,350 is taxed at your child’s tax rate, and then anything over that is taxed at your marginal rate as the parent. There is no earned income limitation like with a Roth IRA, which we discuss below.
Coverdell Education Savings Account (ESA)
This account works similarly to a 529 plan but with a few more restrictions, and it is primarily geared more towards K-12 expenses. While you are not restricted on investment choices like in a 529 plan, some of the restrictions are:
- A $2,000 per year combined limit for contributions in case other family members opened the same account for your child (a 529 does not cap combined contributions)
- Contributions are prohibited after age 18
- Modified adjusted gross income (MAGI) must be below $190,000-$220,000 for married filers or $95,000-$110,000 for single filers to make a contribution
The MAGI range is where the full contribution is reduced until fully phased out over the top end of those ranges. Withdrawals for qualified education expenses are tax and penalty-free. This account must be fully withdrawn by the time the child beneficiary is age 30, or there will be additional taxes and a 10% penalty. Transfers from an ESA to a 529 plan are allowed and are tax-free.
Custodial Roth IRA
Just like you can open a brokerage account for someone under 18, you can also open a Roth IRA as well. The parent would be on the account title with the child and would come off at the same age interval of 18 to 22, so all funds held within would become property of the child beneficiary.
Contributions are still nondeductible and after-tax in nature, so it helps your child build tax-free growth from an earlier age. Your child would need to have earned income to be able to contribute. So, if they work a part-time job during the summer, work for the family business, or start their own lawn care or car washing business, that would count, but they would have to start filing their own tax return to qualify to report the income. If they only earned $2,500 in a year, for example, that would be the max they could contribute to the custodial Roth IRA.
Withdrawals from the basis of this account are always tax and penalty-free, but you have to have the account open for 5 years for the earnings to get the same treatment on withdrawals. The current maximum contribution is capped at $7,000 per year for those under age 50 but has been increased every so often per IRS regulations. Roth IRAs also give you wide access to investments like an ESA or brokerage. Once the child reaches the age of majority and is working full time, they can continue using the account for future retirement and would not have to open a new one.
Crummey Powers Trust
This may be the most complex option on the list and mainly applies to those parents (or other relatives) out there with potential federal estate tax issues trying to reduce the size of their respective taxable estates through gifting and shelter funds from gift taxes. Consulting with a dedicated estate planning attorney is crucial before setting these types of irrevocable trusts up.
Once created, the creator or grantor begins depositing assets into it, usually up to the annual gift exclusion ($19,000 per person for 2025) to not affect their lifetime gift tax exemption. Once deposited and for every other deposit, the beneficiary of the trust is sent a Crummey letter or notice saying they have 30 to 60 days to withdraw the funds since it gives them a present interest in the gift.
If this is not sent, then the IRS can determine the amounts gifted do not qualify for the exemption. Once lapsed, the option to withdraw goes away, and the funds remain in trust where the grantor/parent can still maintain control and the trustee can keep investing for their benefit. Setting up costs can be high for these trusts, and there is always the risk that once the beneficiary is old enough, they withdraw the funds, so looping your beneficiary in early on what to do is critical.
If you have questions about any of these types of savings accounts or you’re curious to learn more about which one could be the best option for your child, please don’t hesitate to reach out to set up a time to chat with one of our advisors.
