Giving Your Kid a Financial Head Start

529 Plans are one of the most popular tools for education savings. These accounts were specifically designed to help families save for school costs, and they offer tax-advantaged savings features. The money grows tax-deferred, and as long as it is used for qualified education expenses, withdrawals are completely tax-free. That includes not only college tuition and room and board, but also certain trade and apprenticeship programs and up to $20,000 per year for K–12 tuition. One of the features we appreciate most is that the parent or grandparent who opens the account stays in full control. If your child earns a scholarship or decides not to use all the funds, you’re not stuck. You can change the beneficiary to another family member, and up to $35,000 of unused funds can potentially be rolled into the child’s Roth IRA over time, subject to IRS rules. Over the years, 529 plans have become more flexible and more useful, which gives us a lot of confidence in them as a long-term planning tool. The maximum contribution is $18k per parent per child, with a 5 year forward allowance totaling $90k per parent per child.

UGMA and UTMA accounts give the child the most flexibility. These accounts allow you to save and invest for a child without limiting the money to education. The funds can be used for almost anything that benefits your child, whether that is a first car, extracurricular activities, college, or even a down payment on a home. The trade-off is that the money legally belongs to the child from day one. You manage the account as custodian until they reach the age of majority, typically 18 or 21, and then they take full control. For some families, that is perfectly fine. For others, the idea of handing over unrestricted access to a young adult gives them pause. These accounts do not offer the same tax benefits as a 529 plan, and they can have a larger impact on financial aid, but they are still an excellent tool when flexibility is the top priority. Annual contributions are unlimited. 

A custodial Roth IRA is one of the most powerful gifts you can give a child who is earning income. Once your child has wages from a job or self-employment, they can begin contributing to a Roth IRA, up to the annual IRS limit or the amount they earned, whichever is less. Contributions are made with after-tax dollars, which usually means paying taxes at one of the lowest rates they will ever face. From there, the money can grow tax-free for decades, and qualified withdrawals in retirement are tax-free as well. It is hard to overstate the impact that starting this process early can have. Even modest contributions made during the teenage years can grow into substantial sums over a lifetime. While this account is intended for retirement, contributions can always be withdrawn tax- and penalty-free if needed. For working children, this is one of the most meaningful ways to help them build long-term financial security. Annual contributions are capped at the child’s earned income or $7,500 for 2026, whichever is lower.

Trump Accounts are a newly proposed savings option designed to encourage families to start investing for their children at an early age. Based on what has been shared so far, families may be able to contribute up to $5,000 per year using after-tax dollars, with the money invested in low-cost U.S. stock index funds. The earnings are expected to grow tax-deferred, and withdrawals would generally be taxable in the future. The current proposal suggests that the account transitions into a retirement-style account when the child turns 18, with early withdrawals potentially subject to taxes and penalties unless they are used for certain purposes such as education or a first home purchase. We think the idea is interesting, and if implemented well, these accounts could become another useful planning tool. At the same time, there are still many details being worked out, including how the accounts will be administered and the exact tax rules. Because of that, we view them as a promising option worth watching rather than a clear replacement for the accounts that families already know and use successfully today.

A regular investment account in your name with your child as a beneficiary is always a good old-fashioned option. This allows you to maintain control of the account and any future distributions; there’s full flexibility for what the funds can be used for. In this scenario, because this is your account you own the taxes. Any gains or losses count towards your tax return. All of the above, coupled with the fact that there are no contribution limits, makes this an attractive way to save for your child’s future.

So, what is the best account for your child? If education is your primary goal, a 529 plan is usually our favorite option because of its strong tax benefits and the increasing flexibility built into the rules. If you want the funds to be available for almost any purpose, a UGMA or UTMA account may be a better fit. If your child is working and you want to help them build wealth for the very long term, a custodial Roth IRA can be incredibly impactful. If you want an account that gives you full control of everything without restrictions, then opening an account in your name and listing your child as the beneficiary could be a good fit. As for Trump Accounts, there are still too many unanswered questions to know exactly where they fit, but we’ll continue to monitor new developments as more details become available.

In the end, the best choice depends on your goals, and in many cases, it may be beneficial to use more than one account type. If saving for your children is top of mind, we’d be happy to discuss which strategies may make the most sense for your family at our next meeting.

Disclosures:

Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. (19-LPL)

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Trump Accounts offer tax deferred growth on earnings and provide tax free withdrawals when distributions are qualified. Contributions may include after tax family contributions, pre tax employer contributions, and a one time $1,000 federal contribution for eligible children born between 2025 and 2028. Withdrawals prior to age 59½ may result in a 10% IRS penalty tax, in addition to current income tax, and may be restricted until the child reaches age 18. Annual contribution limits and other restrictions apply. Some Trump Account rules and regulations are still forthcoming from the U.S. Treasury and IRS. Clients should consult with a qualified tax advisor or financial professional before making any decisions.