Investing in the Next Generation
There are four sensible accounts for money you are setting aside for a child, and the right one is decided almost entirely by what the money is for. Start there, not with the account names.
Three questions settle most of it
Nearly every comparison you will read opens with a list of accounts. That is the wrong end. These three questions narrow four options to one or two in about a minute.
1. What is the money actually for?
If the answer is college, a 529 is very hard to beat and you can stop reading. If it is "their future" in a general sense, you are choosing between flexibility and tax treatment, and the rest of this page is about that trade.
2. Does the child have earned income?
A job, a real one, changes the answer completely. It unlocks a custodial Roth IRA, which has the best tax treatment of any account on this page. Without earned income it is simply unavailable.
3. How much control do you want to keep?
A custodial account becomes the child's outright property at the age of majority, and they can spend it on anything. A 529 stays under your control indefinitely. This is the question people think about last and regret first.
Four accounts, compared on what matters
The differences that change outcomes, rather than the feature lists.
| Account | Best for | Tax while it grows | Tax coming out | Who controls it | Financial aid |
|---|---|---|---|---|---|
| 529 plan | Education, unambiguously | None | Tax-free for qualified education costs | You, indefinitely. You can change the beneficiary | Parent asset, assessed at up to 5.64% |
| Custodial Roth IRA | A child with real earned income | None | Contributions any time, tax-free. Qualified withdrawals tax-free | You until the age of majority, then the child | Retirement accounts are not reported as assets |
| UTMA / UGMA | Flexibility, and gifts with no strings | Taxed annually, and the kiddie tax can apply | Capital gains rates, with a basis step-up at death | You until the age of majority, then the child, absolutely | Student asset, assessed at 20% |
| Trump Account | Capturing the federal $1,000, and children with no earned income | None | Ordinary income, with a 10% penalty before 59½ unless an exception applies | Locked until 18, then traditional IRA rules | Retirement accounts are not reported as assets |
Financial aid percentages are the FAFSA assessment rates: a dollar in a student-owned account reduces aid eligibility by about 20 cents, against roughly 5.6 cents for a parent-owned one. On a $50,000 balance that is the difference between losing about $10,000 of eligibility and about $2,800.
Where the real opportunities are
529s are covered exhaustively everywhere. These two are not, and both are more useful than their coverage suggests.
The best account on this page, if you can use it
There is no minimum age for a Roth IRA. There is only an earned income requirement. A fifteen-year-old with a summer job, a teenager doing genuine paid work in a family business, or a child with real modeling or acting income can all have one.
The contribution is the lesser of what they earned and the annual IRA limit, which is $7,500 in 2026. You can fund it on their behalf, so the child keeps their paycheck and you make the deposit; the requirement is that the earned income exists, not that those specific dollars go in.
What makes it the strongest option is the combination of tax treatment and flexibility. Growth is untaxed, qualified withdrawals in retirement are untaxed, and contributions can be withdrawn at any time for any reason with no tax and no penalty. That last point matters more than people expect, because it means the account is not a one-way door.
- The compounding runway is the whole argument. Money contributed at 16 has around fifty years before retirement. Very little else in financial planning has that much time to work.
- Document the earned income properly. Keep records of the work performed and the amounts paid, particularly for work inside a family business. This is the part that gets tested.
- It is not reported as an asset on the FAFSA, unlike a custodial brokerage account.
Take the free money, then think carefully
Children born between 2025 and 2028 are eligible for a one-time $1,000 federal contribution, and claiming it costs nothing but paperwork. That part is not a close call.
Funding beyond the free $1,000 is a genuine question rather than an obvious yes. Contributions are made with after-tax dollars, and only your own contributions come back tax-free. The federal seed, any employer contributions, and all of the growth on everything come out as ordinary income.
The counterweight is that nothing inside the account is taxed while it grows, which a custodial brokerage account cannot say. Which effect wins depends on how much the account throws off each year and what bracket the child eventually lands in.
Read the full analysis of Trump Accounts →"But what if they do not go to college?"
This was the strongest argument against 529s for twenty years. It is now substantially weaker, and most parents have not heard why.
Unused 529 money can become a Roth IRA
Up to $35,000 over the beneficiary's lifetime can be rolled from a 529 into a Roth IRA in their name. It turns leftover education money into retirement money rather than a penalty.
The conditions are real, though
The 529 must have been open at least 15 years, contributions from the last five years are excluded, the beneficiary must own the Roth, and each year's rollover counts against their annual Roth limit.
What it means in practice
Open the 529 early, even with a small amount, because the 15-year clock starts at account opening. That single act preserves an option worth having later.
Three traps worth knowing about
A custodial gift is irrevocable
Money placed in a UTMA or UGMA belongs to the child. Not in principle, legally. At the age of majority, which varies by state and is typically between 18 and 21, they receive it outright and can spend it on whatever they like. If that thought is uncomfortable, the account is wrong for you.
The kiddie tax on custodial accounts
A child's unearned income above $2,700 in 2026 is taxed at the parents' marginal rate. The first $1,350 is tax-free and the next $1,350 is at the child's own rate. A custodial brokerage account large enough to matter will generate enough dividends to cross that line.
Financial aid treatment differs sharply
A UTMA is a student asset, assessed at 20% on the FAFSA. A parent-owned 529 is assessed at up to 5.64%. Converting a UTMA into a custodial 529 is possible and changes the treatment, though the money remains the child's.
If you want the short version
Not advice for your situation, but a sequence that suits most families and is easy to adjust from.
| Order | Do this | Why |
|---|---|---|
| First | Claim the federal $1,000 if the child was born 2025 to 2028 | Free, one-time, and no obligation to add anything |
| Second | Capture any employer contribution to a Trump Account | Compensation you do not otherwise receive |
| Third | Open a 529 early, even with a small balance | Best account for education, and it starts the 15-year Roth rollover clock |
| Fourth | Fund a custodial Roth IRA the year earned income appears | Best tax treatment available, with a fifty-year runway |
| Fifth | Use a UTMA only for money you are content to hand over outright | Maximum flexibility, at the cost of control and aid treatment |
Related reading and tools
529 College Savings Planner
Project education costs and see whether your current saving is on track, including the monthly amount needed to close a gap.
Open the tool →Trump Accounts, Honestly Assessed
The free $1,000, the basis problem nobody mentions, and where the account genuinely earns its place.
Read the article →Saving & Family
Everything on household saving and planning for children in one place, including net worth and cash flow.
Browse the topic →Questions parents ask
What is the best investment account for a child?
It depends on what the money is for. For education specifically a 529 is very hard to beat, because growth is tax-free for qualified costs and the account stays under your control. For a child who has real earned income, a custodial Roth IRA has the best tax treatment of any option and a compounding runway of roughly fifty years. For money you want completely unrestricted, a UTMA works but becomes the child's outright property at the age of majority.
Can a child have a Roth IRA?
Yes. There is no minimum age for a Roth IRA, only an earned income requirement. A child with a summer job, genuine paid work in a family business, or other reportable earned income can have a custodial Roth IRA. The contribution is limited to the lesser of what they earned and the annual IRA limit, which is $7,500 in 2026. You can fund it on their behalf, so the child keeps their wages while you make the deposit.
What is the difference between a UTMA and a 529?
Control and tax treatment. A 529 stays yours, can have its beneficiary changed, grows tax-free, and is tax-free coming out for qualified education costs. A UTMA is an irrevocable gift: the money legally belongs to the child, they receive it outright at the age of majority and can spend it on anything, it is taxed annually as it grows, and it is assessed at 20% as a student asset on the FAFSA against up to 5.64% for a parent-owned 529.
What happens to a 529 if my child does not go to college?
You have several options, and the strongest one is newer than most people realize. Up to $35,000 over the beneficiary's lifetime can be rolled into a Roth IRA in their name, turning unused education money into retirement money rather than a penalty. The 529 must have been open at least 15 years, contributions from the last five years are excluded, and each year's rollover counts against the beneficiary's annual Roth limit. You can also change the beneficiary to another family member.
What is the kiddie tax and when does it apply?
It is the rule that taxes a child's investment income at their parents' marginal rate rather than their own. For 2026 the first $1,350 of unearned income is tax-free, the next $1,350 is taxed at the child's rate, and anything above $2,700 is taxed at the parents' rate. It applies to children under 18 and to dependent full-time students under 24. It affects custodial brokerage accounts, and it is one reason a tax-sheltered account is often better than a UTMA for long-term money.
Do custodial accounts hurt financial aid?
Yes, more than most parents expect. Money in a UTMA or UGMA is reported as a student asset on the FAFSA and assessed at 20%, while a parent-owned 529 is assessed at up to 5.64%. On a $50,000 balance that is roughly $10,000 of lost aid eligibility against roughly $2,800. A UTMA can be converted into a custodial 529, which changes the assessment, though the money still legally belongs to the child.
Should I open a Trump Account for my child?
Claim the $1,000 federal contribution if your child was born between 2025 and 2028, and take any employer contribution offered. Both are money you do not otherwise receive. Funding beyond that is a real question, because only your own contributions come back tax-free while the federal seed, employer money, and all growth are taxed as ordinary income on withdrawal. Against that, nothing inside the account is taxed while it grows, which a custodial brokerage account cannot match.
Deciding what to set aside, and where?
These accounts interact with your own tax picture, your estate plan, and your gifting. We look at them together rather than one at a time, and we will tell you when the simplest option is the right one.