Saving on behalf of kids: a guide to five investment vehicles

Understanding children’s savings options

As a financial advisor, you know how saving for a child’s future can feel overwhelming for many clients. Parents may be juggling daycare costs, after-school activities, and daily realities of raising a family, all while trying to imagine what college, a first home, or the start of a career might look like years down the road.

Families saving on behalf of children have a growing range of vehicles to consider. Long-standing options include 529 plans, custodial brokerage accounts and custodial IRAs. Newer options include Trump Accounts, established under Section 530A of the Internal Revenue Code. Each account is designed for different goals, with distinct rules around taxes, ownership, flexibility, contribution limits, and access to funds.

Because no single vehicle is designed to meet every need, advisors play an important role in helping clients understand the available options and the tradeoffs associated with each.

Below we overview each account and explain how they are taxed, how they grow, and where they fit into a client's broader plan.

Why 529 plans remain a cornerstone of education savings

529 plans have a long track record and remain a proven, tax-advantaged way to save for education. Not only do contributions grow tax-free, withdrawals for qualified expenses such as tuition, books, and room and board are also tax-free. In nearly 40 states, families can receive an additional income tax deduction or credit on contributions, adding another layer of value. There are no income limits to contribute, and aggregate maximums are high, often exceeding $500,000 per beneficiary.

Beginning in 2026, 529s have become even more flexible, as the annual withdrawal limit for beneficiaries enrolled in kindergarten-12 doubled from $10,000 to $20,000. This gives families greater ability to support private, public, or parochial schools. The definition of qualified expenses has also widened beyond tuition to include tutoring, standardized test fees, dual-enrollment programs, and online coursework. Additionally, credential programs recognized by state or federal governments, the military, or the Workforce Innovation and Opportunity Act, are now eligible qualified expenses.

These changes make 529s more than college savings plans, as many now view these accounts as education and career-pathing plans. They increasingly function as education savings plans that cover many pathways, from four-year degrees to trade schools and workforce training. If funds remain unused, up to $35,000 can be rolled into the beneficiary's Roth IRA over their lifetime, subject to annual contribution limits and a 15-year account requirement. This added flexibility helps address concerns about overfunding if a child does not attend college. For clients whose primary goal is education, this is often the most efficient starting point.

How do custodial brokerage accounts (UGMA/UTMA) fit into the picture?

Custodial accounts, established under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), are taxable brokerage accounts an adult opens and manages on a child's behalf. Their appeal is straightforward: no contribution limits and no restrictions on how the money is used, as long as it benefits the child. That flexibility lets families save for a car, a first apartment, or education without committing to a single purpose.

Contributions are irrevocable gifts, so they cannot be reclaimed or redirected to another child. The assets legally become the child's property, and control transfers to them at the age of majority, typically 18 to 21 depending on the state, at which point they can use the money for any purpose they choose. On the Free Application for Federal Student Aid (FAFSA), custodial accounts count as a student asset and are assessed at up to 20% of value, compared with a maximum of 5.64% for parent-owned 529 assets, which can weigh on financial aid eligibility.

The tax treatment follows the “kiddie tax” rules. For 2026, a portion of a child's unearned income is tax-free, the next portion is taxed at the child's rate, and unearned income above $2,700 is taxed at the parent's marginal rate. There is no tax-free growth, and capital gains apply on withdrawals. For clients who value flexibility above all, custodial accounts are a useful tool. When education is the specific goal, it is worth walking them through what they give up in tax efficiency and aid treatment.

How can traditional and Roth IRAs work for children?

When a child begins earning money, a custodial IRA opened and managed by an adult can turn a modest paycheck into a powerful head start, because time is the account's greatest asset.

A custodial IRA may be an important option for a young saver with earned income, whether structured as a Roth IRA or a Traditional IRA. With a Roth IRA, contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free, which may be meaningful for a child who is in a relatively low tax bracket today. A Traditional IRA, by contrast, may offer a potential upfront deduction, with contributions growing tax-deferred and taxes generally paid when funds are withdrawn. For 2026, contributions across Roth and Traditional IRAs are capped at the lesser of $7,500 or the child’s total earned income for the year, and the money used to fund the account does not have to come directly from the child’s own paycheck. The relative benefit of each structure depends on the child’s income, tax situation, and how the account may be used over time.

A practical point for planning conversations: because IRAs are retirement accounts, they are not reported as assets on the FAFSA, though distributions count as income on a future year's application. Advisors can also frame the Roth as a flexible foundation, as contributions can be withdrawn without penalty, and qualified education expenses avoid the 10% early-withdrawal penalty, even if ordinary income tax may apply to earnings. Used well, an IRA teaches a child the habit of investing while their runway is longest.

What do you need to know about Trump Accounts?

One of the biggest challenges in retirement planning is not simply encouraging people to save but helping them get invested early enough to benefit from decades of compounding. Trump Accounts are designed to address that challenge by introducing children to the capital markets from birth.

Beginning in 2026, eligible children born between 2025 and 2028 can receive a one-time $1,000 federal contribution. Children born before 2025 are also eligible to have a Trump Account opened on their behalf if they meet the program’s requirements, but they are not eligible for the federal contribution.

But the $1,000 seed investment is only part of the story. Families may contribute up to $5,000 annually, and new Treasury guidance creates another potential source of funding: the workplace. Employees may be able to direct pre-tax dollars through an employer cafeteria plan into a dependent’s Trump Account, while employers can contribute directly through a qualifying program. Up to $2,500 in annual employer contributions may be excluded from an employee’s gross income, subject to applicable requirements. That means Trump Accounts could evolve beyond a family savings vehicle into a new type of employee benefit—one that helps parents invest for their children while giving employers another way to support employees’ long-term financial goals.

Trump Accounts are intended for long-term retirement savings rather than near-term spending. Withdrawals generally cannot begin until age 18, after which the account is generally governed by the same tax and distribution rules as a Traditional IRA. In general, taxable withdrawals are treated as ordinary income rather than capital gains, and distributions before age 59½ may be subject to a 10% additional tax, unless an exception applies, such as for certain qualified education expenses or a first-time home purchase.

The treatment of Trump Accounts for financial aid purposes continues to evolve, and advisors should monitor future guidance from the U.S. Department of Education before incorporating FAFSA considerations into planning.

The bottom line: how do you help clients choose?

There is rarely a single right answer, and often the strongest strategy uses a mix of different types of accounts. A 529 plan is designed around education and career-pathing expenses. A custodial brokerage account offers a broader use of funds, but with less tax efficiency and different financial aid treatment. A custodial IRA can introduce retirement savings when a child has earned income, while Traditional and Roth structures differ in how contributions and withdrawals are taxed. Trump Accounts add a new dimension by giving eligible children an early stake in the capital markets through a federally seeded investment account designed for decades of long-term compounding. Each vehicle brings a different combination of purpose, flexibility, and trade-offs, making comparison as important as selection.